BANCASSURANCE THE INDIAN

EXPERIENCE
A THESIS SUBMITTED TO MADURAI KAMARAJ UNIVERSITY IN PARTIAL FULFILMENT
OF THE REQUIREMENTS FOR THE DEGREE OF

DOCTOR OF PHILOSOPHY IN COMMERCE

Submitted by
C.CHELLADURAI
Regd. No: 3430

Supervisor and Guide

Dr. N.ASHOK KUMAR
HEAD& ASSOCIATE PROFESSOR
DEPARTMENT OF COMMERCE
V.H.N.S.N.COLLEGE
(Re-accredited with A Grade by NAAC)
VIRUDHUNAGAR

October 2010
Dr. N. ASHOK KUMAR
HEAD & ASSOCIATE PROFESSOR
DEPARTMENT OF COMMERCE
V. H. N. S. N College
Virudhunagar 626 001

CERTIFICATE

This is to certify that the thesis entitled BANCASSURANCE

THE INDIAN EXPERIENCE is a bonafide research work carried out

independently by Mr. C.CHELLADURAI, HEAD i\c in DEPARTMENT

OF E-Commerce, V.H.N.S.N College, Virudhunagar, during 2006-2010 in

partial fulfillment of the requirement for the award of the Degree of Doctor

of Philosophy and that the thesis has not formed the basis for the award

previously of any degree, diploma, associateship, fellowship or any other

similar titles.

October, 2010 (Dr. N. ASHOK KUMAR)

VIRUDHUNAGAR.
C.CHELLADURAI, M.Com.,M.Phil.
HEAD i\c DEPARTMENT OF E-Commerce
V.H.N.S.N. College
Virudhunagar 626 001

DECLARATION

I hereby state that this thesis entitled BANCASSURANCE THE

INDIAN EXPERIENCE submitted for the award of the Degree of Doctor
of Philosophy in Commerce is my original work under the supervision of
Dr.N.ASHOK KUMAR and no part of this thesis has been submitted for
the award of any degree, diploma, associateship, fellowship or any other
similar titles.

Place: Virudhunagar Signature of the candidate

Date:

(C.CHELLADURAI)

Countersigned

(Dr. N. ASHOK KUMAR)

 TABLE OF CONTENTS
PAGE
CHAPTER TITLE
No.

ACKNOWLEDGEMENTS i

LIST OF TABLES ii

LIST OF FIGURES vi

INTRODUCTION AND DESIGN OF THE

I 1
STUDY

II BANCASSURANCE A REVIEW 37

III BANCASSURANCE IN INDIA 85

IV A SWOT ANALYSIS OF BANCASSURANCE 149

IN INDIA

V CUSTOMERS PERCEPTION 184

SUMMARY OF FINDINGS, SUGGESTIONS

VI 247
AND CONCLUSION

BIBLIOGRAPHY 284

APPENDIX

i
 ACKNOWLEDGEMENTS

A record of thankfulness towards various resourceful personalities, who either

directly or indirectly, bestowed their contributions to the consummation of the present

doctoral thesis, is presented below:

I express my profound gratitude to my guide, Dr. N. ASHOKKUMAR,

Associate Professor & HEAD, Department of Commerce, V.H.N.S.N.College,

Virudhunagar for his valuable guidance, encouragement, timely suggestions and

sincere efforts during the course of my research work, which helped me immensely to

make this dream into a reality. He evinced keen interest in rightly guiding me all the

stages of this research work.

I am highly thankful to the Secretary and Correspondent and the members of

the Managing Board, V.H.N.S.N.College, Virudhunagar for their parental patronage

in deputing me to complete the Ph.D., course .

I am specially grateful to Dr. P. SUNDARA PANDIAN, Associate Professor

in Commerce, V.H.N.S.N.College, Virudhunagar for his sincere interest in my

research work. His encouragement and timely suggestions have helped me a lot to

complete this work.

I place on record my deep sense of gratitude and sincere thanks to

Prof. V. MANOHAR, Assistant Professor, Department of Commerce,

V.H.N.S.N.College, Virudhungar, who helped me in the application of statistical tools

in the analysis.

ii
 My thanks are due to Mr. K. VEERAMANI, and Mr. N.KANAGAVEL for

computerizing the thesis in its best possible form.

I am extremely thankful to the Management and Executives of Public and

Private Banks and Private Insurance Companies in providing me with the primary

data and the secondary data required for the present study.

I bow my head before God Almighty for showering his blessings on me and

guiding me through the right path, throughout my life.

C.CHELLADURAI

iii
 LIST OF TABLES

Table Page
Title
No. No.
3.1 NUMBER OF REGISTERED INSURERS IN INDIA 95

3.2 INSURANCE COMPANIES OPERATING IN INDIA - 96

LIFE INSURERS

3.3 INSURANCE COMPANIES OPERATING IN INDIA - 97

NON-LIFE INSURERS

3.4 INDIAN COMPANIES WITH FOREIGN PARTNERSHIP 99

3.5 LIFE INSURANCE BUSINESS IN FORCE (Number of Policies) 100

3.6 LIFE INSURANCE BUSINESS IN FORCE (Number of Policies) 101

(Private Insurers)

3.7 LIFE INSURANCE BUSINESS IN FORCE (Sum Assured) 102

( Private Insurers)

3.8 LIFE INSURANCE BUSINESS IN FORCE (Sum Assured) 103

3.9 TOTAL LIFE INSURANCE PREMIUM 105

3.10 NON-LIFE INSURANCE BUSINESS IN FORCE ( In Terms of 108

GROSS DIRECT PREMIUM)

3.11 NON-LIFE INSURANCE BUSINESS IN FORCE In Terms of 109

GROSS DIRECT PREMIUM (Public Sector Insurance
companies)

3.12 NON-LIFE INSURANCE BUSINESS IN FORCE In Terms of 111

GROSS DIRECT PREMIUM (Private Sector)
3.13 BANCASSURANCE ALLIANCE 132

3.14 BANCASSURANCE BUSINESS IN INDIA 145

3.15 BANCASSURANCE BUSINESS CONDUCTED BY COMPANIES 147

iv
5.1 OCCUPATION WISE CLASSIFICATION OF RESPONDENTS 184

5.2 AGE-WISE CLASSIFICATION OF RESPONDENTS 185

5.3 GENDER- WISE CLASSIFICATION OF RESPONDENTS 186

5.4 MARITAL STATUS 187

5.5 DETAILS OF CHILDERN 188

5.6 ANNUAL INCOME OF RESPONDENTS 189

5.7 TYPE OF BANKS AND NUMBER OF RESPONDENTS 190

5.8 TYPE OF BANKS AND CLASSIFICATION OF RESPONDENTS 191

5.9 TYPE OF ACCOUNTS 192

5.10 No. OF YEARS OF ASSOCIATION WITH BANKS 193

5.11 TYPES OF INSURANCE POLICY 195

5.12 INSURANCE PROVIDES PROTECTION 196

5.13 INSURANCE IS AN ABSOLUTE NECESSITY FOR FAMILY 197

5.14 INSURANCE- AN INVESTMENT OPTION 198

5.15 AWARENESS OF BANCASSURANCE 199

5.16 SOURCES OF PURCHASING THE INSURANCE POLICY 200

5.17 CATEGORY OF BANCASSURANCE CUSTOMERS 201

5.18 SOURCES OF INFORMATION 202

5.19 KIND OF INSURANCE POLICY 204

5.20 REASONS FOR TAKING INSURANCE POLICY FROM BANKS 206

5.21 PREFERENCE OF DISTRIBUTION CHANNEL 208

v
5.22 BANKERS GIVE EXPERT ADVICE 210

5.23 CONVENIENCE TO THE CUSTOMERS 212

5.24 EASY ACCESSIBILITY FOR CUSTOMERS 214

5.25 FAMILIER WITH THE INSURANCE POLICES OFFERED BY 216

BANCASSURANCE
5.26 CUSTOMER SATISFACTION 219

5.27 BANK DOSPLAYS FAMILIARISE THE INSURANCE 222

PRODUCTS
5.28 BANK WEBSITES MAKE THE CUSTOMERS MORE 227
FAMILIAR WITH DIFFERENT TYPES OF INSURANCE
POLICIES
5.29 DIRECT CONTACTS AND PHONE CALLS OF THE BANK 230
EMPLOYEES FAMILIARISE THE INSURANCE PRODUCTS
AMONG CUSTOMERS.
5.30 BANKS AS A ONE STOP SHOP FOR ALL FINANCIAL NEEDS 233
5.31 BANKS ARE MORE RELIABLE THAN INSURANCE 236
COMPANIES
5.32 BANKERS UNDERSTAND CUSTOMER NEEDS BETTER AND 239
PROVIDE EXPERT ADVICE
5.33 DO YOU PLAN TO TAKE ANY LIFE INSURANCE POLICY IN 242
FUTURE
5.34 BANCASSURANCE AS A CHOICE TO TAKE INSURANCE 243
POLICY IN FUTURE

vi
 LIST OF FIGURES

Figure No. TITLE PAGE

No.
5.1 KIND OF INSURANCE POLICY 205

5.2 BANKERS GIVE EXPERT ADVICE 211

5.3 CONVENIENCE TO THE CUSTOMERS 213

5.4 EASY ACCESSIBILITY FOR THE CUSTOMERS 215

5.5 FAMILIER WITH THE INSURANCE POLICES 218

OFFERED BY BANCASSURANCE

5.6 OPINION ON CUSTOMER SATISFACTION 221

5.7 BANK DOSPLAYS FAMILIARISE THE 225

INSURANCE PRODUCTS
BANK WEBSITES MAKE THE CUSTOMERS
5.8 MORE FAMILIAR WITH DIFFERENT TYPES OF 229
INSURANCE POLICIES
DIRECT CONTACTS AND PHONE CALLS OF
5.9 THE BANK EMPLOYEES FAMILIARISE THE 232
INSURANCE PRODUCTS AMONG CUSTOMERS
BANKS AS A ONE STOP SHOP FOR ALL
5.10 235
FINANCIAL NEEDS
BANKS ARE MORE RELIABLE THAN
5.11 238
INSURANCE COMPANIES
BANKERS UNDERSTAND CUSTOMER NEEDS
5.12 241
BETTER AND PROVIDE EXPERT ADVICE

vii
 CHAPTER I

INTRODUCTION AND DESIGN OF

THE STUDY
1.1 Introduction

For a long time, the insurance industry has been locked in an ice age as

the basic structure of the industry has remained more or less fixed. The

glacier is now melting, revealing new challenges as traditional distribution

and customer management processes are not proving to be adequate for the

new age. The shape of the insurance industry is being changed by

developments in distribution. The main driver is the lowering cost of

increasingly sophisticated technology, enabling new economies of scale and

scope, which extends beyond national boundaries.

The touch point with the ultimate customer is the distributor and the

role played by him in the insurance markets is critical. It is the distributor

who makes the difference in terms of the quality of advice for choice of

product, servicing of policy, and settlement of claims. In the Asian markets,

with their distinct cultural and social ethos, these conditions will play a

major role in shaping the distribution channels and their effectiveness.

The banking and insurance industry have changed rapidly in the

changing and challenging economic development throughout the world. In

the competitive and liberalized environment everyone is trying to do better

than others and consequently survival of the fittest has come into effect.

1
Insurance companies are also to be competitive by cutting cost and serving

in a better way to the customers. Now the time has come to choose and

adopt appropriate distribution channel through which the insurance

companies can get the maximum benefit and serve the customers in

manifold ways. The intermediaries in the insurance business and the

distribution channels used by carriers will perhaps be the strongest drivers of

growth in this sector. Multi-channel distribution and marketing of insurance

products will be the smart strategy which continues to play an important role

in distribution, alternative channels like corporate agents, brokers and

bancassurance will also play a greater role in distribution. The time has

come for the industry to gradually move from traditional individual agents

towards new distribution channels with a paradigm shift in creating

awareness and not just selling products.

The Indian insurance sector has undergone a sea change in the last ten

years, ever since the sector was opened up for private players. Traditionally,

insurance products are sold only through agents and they account for a

major chunk of the business in retail segment. With the opening up of this

sector to private players, competition has become more intense and the

public sector major LIC has been challenged with a flood of new products

and new means of marketing. Instead of falling back on the individual

2
agents for business, new insurance companies have started to experiment

with other channels such as bancassurance and industry brokers.

The new generation companies have attempted appealing only to the

middle, upper middle and elite classes in the major cities. Contrasted with

Public sector insurance companies, with their offices across the country, the

new companies have miles to go before they reach anywhere. They must

overcome the mindset of the customer that life insurance is Life Insurance

Corporation of India (LIC) and general-insurance is General Insurance

Corporation of India (GIC), if at all they hope to grow in the market.

Meanwhile, the public sector companies are going to great lengths to

revamp their image to look and feel more contemporary.

In today's scenario, insurance companies must move from selling

insurance to marketing an essential financial product. The distributors

have become trusted financial advisors for the clients and trusted business

associates for the insurance companies, so this calls for leveraging multiple

distribution channels in a cost effective and customer friendly manner.

3
 Bancassurance is one such distribution channel that offers huge

source of untapped opportunities. The business of banking around the globe

is changing due to integration of global financial markets, development of

new technologies, universalisation of banking operations and diversification

in non-banking activities. Due to all these movements, the boundaries that

have kept various financial services separate from each other have vanished.

The coming together of different financial services has provided synergies

in operations and development of new concepts. Bancassurance is one

among them.

Bancassurance simply means selling of insurance products by banks.

In this arrangement, insurance companies and banks undergo a tie-up,

thereby allowing banks to sell the insurance products to its customers. This

is a system in which a bank has a corporate agency with one insurance

company to sell its products. By selling insurance policies bank earns a

revenue stream apart from interest. It is called as fee-based income. This

income is purely risk free for the bank since the bank simply plays the role

of an intermediary for sourcing business to the insurance company.

It has its origin decades ago in France, where this channel of

distribution today is still the predominant source of insurance business. It

4
has grown at different places and taken shapes and forms in different

countries depending upon demography, economic and legislative

prescription in that country.

Bancassurance is a new buzzword. It originated in India in the year

2000. The present day banks have become for more diversified than ever

before. The first Narasimham Committee, has reshaped, the contemporary

financial landscape of commercial banks in India. Therefore, their entering

into insurance business is only a natural corollary and is fully justified too as

insurance is another financial product required by the bank customers.

The importance of bancassurance is felt necessary even from the view

point of insurance industry. With the increased pressures in combating

competition, companies are forced to come up with innovative techniques to

market their products and services. Banking sector with it's far and wide

reach, was thought of as a potential distribution channel, useful for the

insurance companies. Thus, bancassurance is poised to become a key

determinator/ differentiating factor in the Insurance industry as well.

5
1.2 Statement of the Problem

Given Indias size as a continent, it has a very low insurance

penetration and a lower insurance density. The penetration level of the life

insurance in Indian market is abysmally low at 2.3 percent of the GDP with

only less than 10 percent of the total population currently insured.

However, India has a well-entrenched wide branch network of banking

system, which only very few countries in the world could match with. The

bancassurance has not yet fully blossomed as far as India is concerned,

nevertheless they have started yielding the results. It is predicted by the

experts in the field that almost 90 percent of the share of insurance premium

will come from bancassurance business in future. Almost half of the Indian

population are likely to be in the wage earner bracket by 2010, there is

every reason to be optimistic that bancassurance in India will play a long

innings. Currently the bancassurance as a business model is gradually

getting a momentum in India for a bright business prospects in future. With

enormous benefits for banks like increase in revenue, return on assets,

customer retention, better reputation etc., the bancassurance is going to be a

big revolution in the banking industry. The business of banking has become

much more diversified. The customer preferences have shifted from

deposits to investments. Thus, it has become imperative for the banks to

6
retain the customers by providing more value added services under one roof

as well as to find alternative ways to generate income. Since, the

bancassurance provides the best possible solution to this, most of the banks

now a days have started selling insurance products to its customers. Hence,

there is a need for a study to know whether the banks have been benefited

out of bancassurance by way of financial analysis. To understand the

financial impact of bancassurance in the banks in India and the perception of

the customers regarding the bancassurance, a study on bancassurance in

India is undertaken.

1.3 Objectives of the study

The study under report has been undertaken with the following objectives:

1. To trace the origin and the global development of the bancassurance.

2. To examine the evolution of bancassurance in India and to analyse the

performance of bancassurance business.
3. To analyse the strength, weakness, threats and opportunities (SWOT) of
bancassurance in India.
4. To understand the perception of the customers about the bancassurance as
a significant distribution channel with reference to utility and acceptance
of bancassurance as a source of procuring insurance products.
5. To provide concrete suggestions on all aspects relating to bancassurance
business in India, to improve the existing performance.

7
1.4 Hypotheses

Parametric statistical test is applied to test the hypotheses, all of

which have been formulated for the proposed study. They are as follows:

Hypothesis 1

For banks, if the business per employee is low, it is likely to be

attracted to improve productivity by adding bancassurance in their

portfolios.

Hypothesis 2

For insurance companies, non-performing assets of a bank will act as

a brake on the bank/insurance company tie-up for insurance distribution.

Hypothesis 3

If a bank is profitable (by the standard of banking industry), it could

be less likely to get away from core business. On the other hand, a more

profitable bank might be willing to gamble some of its profits to a new line

of business.

Hypothesis 4

For insurance companies, the larger the network of bank branches (for

banks with national presence), the more the likelihood of a bank/insurance

company tie-up for insurance distribution.

8
Hypothesis 5

There is an association between the persons who are planning to take

an insurance policy in future and the persons who prefer bancassurance to

buy an insurance policy in the future.

1.5 Scope of the Study

The study mainly focuses on the financial performance of the

bancassurance business and its contribution to the overall progress of the

banks in India. The present study analyses the awareness of the customers

about the bancassurance and their perceptions on insurance as well as

bancassurance. The study also measures the initiatives taken by the banks in

endorsing the insurance products of their partners. The study throws light

on the SWOT analysis of bancassurance in India. Any research on

bancassurance must cover predominantly three parties such as bankers,

insurers, and customers. This study mainly covers the perception of their

customers in relation to their bankers with regard to the bancassurance

business. The proposed study however is tilted more on bankers than on the

individual insurers. The study also highlights the relationship building by

the banks with their customers as it is the deciding factor for considering the

bank as a one stop shop for all their financial requirement. The study also

9
projects the future direction and growth of bancassurance in India and also

suggests further changes needed to vitalize the bancassurance and sustain its

growth.

1.6 Review of Related Literature

A review of previous studies on bancassurance is essential to

understand its concept and characteristics and also to identify the areas

already investigated so that new areas hitherto unexplored may be studied in

depth.

Compared to the vast amount of descriptive work on bancassurance,

there is only a limited amount of empirical studies conducted on the effects

that bancassurance actually has on the banking company once implemented.

This was largely due to the lack of information that resulted from the poor

company disclosure statements and inadequate collections of national

statistics. The following aims at highlighting the major quantitative findings

of certain researchers that have performed research into the union of banks

and insurers.

The majority of past studies have focused mainly on the risk and

profitability effects resulting from the union of banking and non-banking

firm. One of the earliest studies in this was performed by Boyd and Graham

10
(1986). They conducted an analysis of the risk-of-failure and looked at two

periods around a new Federal Reserve policy (1974s go-slow policy). They

found that the banking companies involvement in non-banking activities is

significantly and positively correlated with the risk of failure over the period

commencing from 1971-1977. However, the period from 1978 to 1983

showed no such significance. Thus, the study indicated that the new policy

had a considerable impact on the banking company expansion into non-

banking activities.

Boyd and Graham conducted another study in the year 1988. The

study was based on a simulation approach whereby they stimulated possible

mergers between banking and Non-banking companies1. The simulation

exercise was done in order to determine whether the risk of bankruptcy will

increase or decrease, if the banking companies are allowed to enter in to

non-banking industry. The main finding of the study was that the risk of

bankruptcy would only decline when the banking companies were allowed

to expand their business into selling the life insurance products.

Graham and Hewitt conducted yet another simulation study in the

year 1993. On the basis of the simulation study, they came to the

1
Zhang, H. 1995, Wealth effects of US bank takeovers, Applied Financial Economics VOL.5, PP. 329 -
336.

11
conclusion that mergers of banking companies with insurance companies

might reduce the risk, whereas the mergers of banking companies with

securities or real estate firms will not reduce the risk of the banks2.

In the year 1994, Saunders and Walter conducted yet another study

by using the similar simulation method with more current data. They also

got the same result that the banks entry into the insurance business is more

profitable to banks than the insurance companies3.

Lown, Oster, Strahan and Sufi made yet another study in the year

2000, regarding the possible mergers of banking companies with insurance

companies4. The major findings of the study indicate that the merger of

banking companies with insurance companies is likely to give gains to both

the parties in the majority of the cases.

In the year 2001 Dr.Estrella, made a detailed study to examine the

diversification benefits for banks by using Performa mergers. In Contrast

to all the previous studies that incorporated accounting data, Dr.Estrella in

his study used market data and a measure of the likelihood of failure that is

2
Pilloff, S.J. 1996, Performance changes and shareholder wealth creation associated with mergers of
publicly traded banking institutions, Journal of Money Credit and Banking VOL.28, PP. 294-310.
3
Saunders and Walter, 1995, Insurance Industry- Ensure Future Secure Journal of Amity Edumedia,
P.12.
4
Moshirian, F. 2004, Financial Services: Global Perspectives, Journal of Banking and Finance, VOL.28,
PP. 269-276.

12
derived through the application of option raising theory to the valuation of

the firm5. His major finding also indicated that both the parties of the

mergers, namely, the banking companies and the insurance companies are

likely to experience gains on both sides.

All the major series of studies on bank expansion into non- banking

activities focus on the wealth effects of such a move. Professors Cybo-

Ottone and Murgia in their research work carried out in the year 2000

analyzed the stock market valuations of mergers and acquisitions that took

place in the European banking industry over a period between 1988

and19976. As a result they found the existence of significant positive

abnormal returns associated with the announcement of product

diversification of banks into insurance. Furthermore, they found that the

country effects do not significantly affect their overall results, suggesting a

homogeneous stock market valuation and institutional framework across

Europe.

Carow (2001) looked at the abnormal returns of bank and insurance

companies following the changing legislation brought as a result of the

5
Amihud, Y., G. DeLong and A.Saunders, 2002, The effects of cross-border mergers on bank risk and
value, Journal of International Money and Finance, VOL.21, PP. 857- 877.
6
DeLong, G.L. 2001, Stockholder gains from focusing versus diversifying bank, mergers, Journal of
Financial Economics. VOL.59, PP. 221-252.

13
Citicorp Travelers Group merger, and discovered that investors expect large

banks and insurance companies to gain significantly from the legislation

removing barriers to bancassurance7.

A break through study was conducted in US in the year 2002 by

professors Cowan, Howell and Power that strongly supported the

introduction of bancassurance8. They conducted as event study surrounding

four separate court rulings and discovered that on an average only larger and

riskier banking companies gain the most with the fee based income

generated through bancassurance business. However, the smaller and

riskier insurers sustain the highest wealth losses due to bancassurance.

Fraser and Kolari in their study titled Bancassurance Mergers

conducted in the year 2005 found that the mergers are positive wealth

creating events by examining abnormal return data9. They further deduced

that scale and scope of economics were the major contributing factors in

these results.

7
Moshirian, F., D. Li, and A. Sim, 2003, The Determinants of Intra-Industry-trade in Insurance
Services, Journal of Risk and Insurance, VOL.70,PP. 269-287.
8
Moshirian, F. 2004, Financial Services: Global Perspectives, Journal of Banking and Finance, VOL.28,
PP. 269-276.
9
Raj Singh D. 2006 Bancassurance: Taking the Lead, Financial Express January 1,
VOL 9, PP. 26-27.

14
 According to Amal Barnes, Panetta and Salleo (2004), the

consolidation in the financial sector is beneficial up to a relatively small size

in order to reap the economy subscale, and that there is no clear evidence

supporting cost reduction stemming from improvements in managerial

efficiencies10.

In another study conducted in the year 2004, Prof.Strioh found that

the non-banking income generated through the bancassurance is volatile and

there is little evidence of diversification benefits existing11. The majority of

the past studies have found the risk reduction and wealth creating benefits

which are associated with the expansion of banks into the insurance

industry.

The book New Trends in World Bancassurance (2003) by Corinne

Legrand brings out the bancassurance business models operating across the

world12. The author analyses the strengths and the weakness of each of the

various bancassurance business models in operation and also does an

analysis of cost structures in European bancassurance.

10
Falautano, Isabella and Emanuele Marsiglia, 2006, Integrated Distribution of Insurance and Financial
Services and Value Creation: Challenges ahead, The Geneva papers on Risk and Insurance, Vol. 28, No.
3, PP. 481-494.
11
Romain Durand, 2005, Bancassurance across the Global: Meets with very mixed response, SCOR
technical Newsletters, VOL.12, No. 10, PP. 35-42.
12
Lewis, M. 1990, Banking as insurance, in E. P. M. Gardener, ed., Chapter 13: The Future of Financial
Systems and Services (St. Martins), PP. 123-130.

15
 In his book Europe and Bancassurance-A work in Progress

(published in the year 2003) Richard Reed explains the difference between

one European country (EU) and another on the success of bancassurance as

a distribution channel for life insurance products13. The author identifies the

broad factors that act as business drivers from country and discuss the

critical success factors for bancassurance models.

A joint study was conducted in the year 2003 on Creating

Tomorrows leading retail bank by price water house coopers (PWC) and

Economist Intelligence unit14. It articulates the challenge set for

bancassurance to achieve real synergistic competitive edge over specialist

bank / insurance providers and new entrants. The authors focus on the

growing demand from customers for superior service, competitive prices

and convenient access to a range of delivery channels.

The book titled Bancassurance: An Asian Perspective is authored

by Michael Dye of NMG financial services consulting. The book was

published in the year 2004. The work is a regulatory tour of rules in Asia.

It is to be noted that the regulatory framework in any country is an evolving

13
Hannan, T. H., and S. A. Rhoades, 2004, Acquisition targets and motives: The case of the banking
industry, The Review of Economics and Statistics, PP.67-74.
14
Wepler John M., R. Linn Thomas and T.Patrick Linnet, 2004, Banks in Insurance: A Five-Year
Retrospective since the Passage of GLB, Bank Director Magazine, 3rd Quarter, PP. 78-82.

16
phenomenon15. It is an ongoing process, which is hooked to the emergence

and growth of the sector and the lessons learnt in the interim period. A brief

survey of regulations in China, Hong Kong, India, Indonesia, Japan,

Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand, and

Vietnam is made. The article ends by saying that ultimately, bancassurance

as a channel, will provide consumers with an alternative access to a wide

range of products through the networks that already exist.

Manoj kumar in his work titled, Development, Growth and Current

Scenario of Bancassurance in the Middle East Region, states that the

phenomenon of bancassurance in Middle East is of very recent origin16.

According to the author, the legal climate in the Middle East is very

conducive to bancassurance and is free from hurdles. It is however quite

important to study the market and evolve a suitable product profile for the

region. He further states that in view of the very low penetration levels of

insurance in the Middle East, the prospects for bancassurance are quite

bright.

15
Amihud, Y., G. DeLong, and A. Saunders, 2005, The effects of cross-border mergers on bank risk and
value, Journal of International Money and Finance, VOL.21, PP.857- 877.
16
Manoj kumar,K. 2006, Development, Growth and Current Scenario of Bancassurance in the Middle
East Region, The ICFAI University Press, PP. 72 -79.

17
 In his article entitled, Bancassurance Concept, Framework and

Implementation, Vineet Aggarwal, discusses the insurance and banking

industry in India17. He analyzes the concept of bancassurance, benefits to

the concerned players and the rational behind the concept. He takes a brief

look at the global experiences and the lessons for India. He analyses the

various entry routes for the prospective players and also describes the

identification process for a bancassurance partner based on CAMEL

model18. The author proposes an ideal business model for bancassurance.

He further discusses the possible bottlenecks and key success factors for

bancassurance in India.

In his write-up Bancassurance in India, Tapen Sinha addresses the

issue of how successful bancassurance model in India19. He also states that

the RBI and IRDA are infavour of bancassurance development in India, as

insurance companies are viewing banks as the main distribution channel20.

In the article titled The Emerging Structure of Bancassurance in

India, by V.V.Ravi Kumar describes how bancassurance is becoming an

17
Vineet Aggarwal,J. 2006, Bancassurance Concept, Framework and Implementation, The ICFAI
University Press , PP. 106 -141.
18
Gneral & Cologne Re.F, 2004, Bancassurance Concepts, The Journal Of Insurance Institute of India,
Vol. No.XXX, July-December, P.46.
19
Rumeer Shah,A. 2003, What makes Bancassurance Happen, IRDA Juornal, Vol. I, No. 9, PP. 20-23.
20
Tapen Sinha Bancassurance in India: Who is Tying the knot and Why, Insurance Chronicle, July 2005,
Vol.XI, No. 6, pp. 144-149.

18
important component of the insurance companys sales portfolio, especially

for the new insurance companies21. The author then focuses on the various

distribution models and takes up the three main models for analysis namely

1) The Corporate Agency Its mode of operation and requirements,

2) Insurance products wrapped around the Banks deposit and loan

products, its design and structure.
3) Referral Model and its mode of operation.

The author states that while the Corporate Agency model is

increasingly emerging as the most popular model of bancassurance in India.

The article Bancassurance A Business Sourcing Model to Indian

Banks, authored by Prof V.G.Chari discusses the implication of the

growing concept of providing integrated financial services to the customers

and also the advantages of bancassurance22. The author presents the forms

the bancassurance could assume, namely, banks floating insurance

subsidiaries or joining some other existing insurance company or banks

selling insurance products through its branches. The author further

21
Ravi Kumar, V.V. The Emerging Structure of Bancassurance in India ,The ICFAI University Press
Dec ,2006, pp. 170 -175.
22
Prof Chari, V.G. 2006, Bancassurance A Business Sourcing Model to Indian Banks ,The ICFAI
University Press, PP. 152 -159.

19
discusses the benefits of risk transfer and also the economic and social

implications of not managing the risks.

In the article Bancassurance: Challenges and Opportunities in India,

Rachana Parihar, the author, brings out as to how bancassurance will be

beneficial to banks, insurers and customers23. He studies the distribution

channels and the cultural issues involved in distribution and presents the

challenges and opportunities of bancassurance in India.

In the article Training A Critical Component for Bancassurance in

India, the author Kailash Mishra, discusses the distribution strategies in

bancassurance24. The author focuses on the implementation issue of

bancassurance, training the critical component of bancassurance,

improving sales management, providing sales management, providing

training resources, sales culture and mentoring.

V.V.Ravi Kumar, in his article Human Resource and Operational

Challenges in Bancassurance An Indian Perspective, focuses on the HR

and operational issues which need to be addressed on a priority basis to

enable the concept of bancassurance to succeed25. Foreign Banks in India,

due to their aggressive sales orientation, have been able to do a much better
23
Rachana Parihar,D. 2006, Bancassurance: Challenges and Opportunities in India,The ICFAI University
Press, PP. 176 -184.
24
Kailash Mishra,V. 2006, Training A Critical Component for Bancassurance in India ,The ICFAI
University Press, PP. 157 -169.
25
Ravi Kumar, V.V. 2006, Human Resource and Operational Challenges in Bancassurance : An Indian
Perspective ,The ICFAI University Press, PP. 175 -182.

20
job in this field. Training, compensation, shaping behavior to cross-sell

aggressively and becoming multiskilled are some of the HR issues

discussed. Banks are required to put their employees through a mandatory

process of training and licensing. Insurance products are seldom bought and

therefore need to be sold aggressively for which Bank employees, highly

oriented towards the counter based selling, need to change their mindset.

Pre-sales and post sales service, proper harnessing of the Banks customer

database and leveraging technology to provide better service levels are the

operational issues analyzed in the article.

Messrs Abhishek Tikmani and Jaichandar.M conducted a study in the

year 2006 to address the issues related to bancassurance in India26. Strategic

considerations at macro economic level on future outlook have also been

discussed along with suggestions and recommendations to sustain the

growth that it has witnessed till now.

Bancassurance Benchmarking Study India 2006, is a new

research initiative undertaken by Watson Wyatt to define bancassurance

performance standards and benchmarks against a cross section of industry

26
Abhishek,T. and M. Jaichandar, 2006, The Issuea related to bancassurance in India, Asia Insurance
Review, PP. 35-37.

21
practices27. Besides covering corporate strategic thinking on the

development and trends of the bancassurance channel, the study includes

market views on the challenges, issues and expectations of Indian

bancassurance businesses. The study analyses the outlook and potential

impact of bancassurance on the Indian financial services market. Watson

Wyatt has analyzed the bancassurance channel from the perspective of

banks, life insurers and non-life insurers separately in the report.

Dr. Ashish Srivastava worte an article on the issues and opportunities

of bancassurance in India28. The author explains the benefits of

bancassurance and models suitable in India. Innovative and customized

products are essential for the success of bancassurance in India. The author

is of the opinion that the success of bancassurance primarily depends on the

customers response, ability of insurers and banks to understand each others

business to ironout differences and seize the emerging opportunities.

Prof. Naliniprava Tripathy of Indian Institute of Management, Indore,

emphasizes the need to change the traditional mindset of the banking

companies to help the bancassurance grow in the country. He advocates that

27
W y a t t , W. 2006, A Comparative Study of Bancassurance Performance and Practices in India,
Watson Wyatt Limited, PP. 1-4.
28
Ashish Srivastava, D. 2003, The issues and opportunities of bancassurance in India, ICFAi Press,
PP.24-28.

22
the bank staff require extensive training to know the details of the insurance

products on offer.

Bancassurance in India Challenges and Strategies, is an article

written by P. Srinivas Subbarao wherein he discusses the prospects,

strategies, challenges and the benefits of bancassurance in India29.

Dr. Manoranjan Sharma who is the chief economist of Canara Bank,

Head Office, Banglore wrote an article in the year 2006 entitled

Bancassurance in India Building Pathways to Growth30. According to

him, the empirical evidence that are available strongly suggest that the

success of bancassurance requires a coherent strategy consistent with the

banks vision. A systematic approach to sound induction and mentoring

programs, using integrated communication internally and empowering

employees is needed to enable these employees to face the inexorable

pressure for competition.

In the article Bancassurance - New concept catching up fast in

India, ABHEEK BRAUA, the senior economist of CRISIL Ltd., highlights

the Modus Operandi of Bancassurance which is suitable to Indian

29
Srinivas Subbarao, P. 2006,Bancassurance in India Challenges and Strategies, Finance Today, PP.
32-33.
30
Manoranjan,S. 2004, Bancassurance in India Building Pathways to Growth, Insurance Professional,
PP. 4-6.

23
conditions31. The study also takes into account the RBI regulations and

IRDA guidelines regarding the formulation of a proper synergy between the

banks and insurance companies.

The research report captioned New Trends in World

Bancassurance, by Corinne Legrand of Milliman Consultant and Actuaries

analyses the bancassurance activity following three dimensions to

understand how integrated the banking and insurance activities are under

various models32. The three dimensions are the distribution of insurance

products, the relationship between the bank and insurance companies and

the various types of insurance products that are available.

Mr. Graham Morris, Director, Watson Wyatt Worldwide conducted a

survey in the year 200833. The purpose of the survey was to focus and

understand how banks and insurers develop strategies for selling life and

non-life insurance products through the vast network of bank branches in

India and the practical issues they face in implementing the sales process.

31
ABHEEK, B. 2005, Bancassurance - New concept catching up fast in India, Center for the Advanced
Study of India, CASI Working Paper, PP. 71-76.

32
Corinne Legrand, M. 2000, New Trends in World Bancassurance, Journal of Financial and Strategic
Decisions, VOL12, PP.25-32.
33
Graham Morris,T. 2008, Bancassurance in India- A Survey , Journal of Money, Credit and Banking,
PP. 17-21.

24
 A total of 25 banks covering PSU, Private, and Foreign banks had

participated in the Survey, along with almost all private life and general

insurers licensed in the country. Nearly 90 percent of interviewed life

insurers are expecting an increase of over 75 percent in new business

premium income every year from the bancassurance channel, despite the

fact that they consider lack of sales culture on the part of banks branch staff

as a key issue in the success of bancassurance. The lack of a clear

bancassurance vision on the part of the bank partner is the most visible

reason for the slow progress in cross selling of insurance, despite the bank

partners having impressive branch networks or large customer bases.

The quality of bank customer data is frequently poor and the absence

of simple CRM tools in most banks makes it difficult to launch specific

initiatives to cross sell insurance products. Public sector banks in the

country, which control more than 90 percent of the total customers, are seem

to be inefficient in recording basic data about customers and managing

available information.

Growth in bancassurance in India will fall short of its potential

unless the perceived lack of sales culture and vision begin to get addressed

by the banks. An understanding of theses differences will facilitate the

25
mutual goal of increasing bancassurance as the leading channel in insurance

distribution in India, said Mr. R.Krishnamurthy, Managing Director,

Distribution Practice, Watson Wyatt Insurance Consulting of the India

office.

The survey conducted by him highlights both bankers and insurers are

bullish about the future outlook of bancassurance with nearly a quarter of

respondents predicting that the overall share of bancassurance would be

about 50 percent or more in the life segment in the year 2010.

About 30 percent of the life insurers have indicated that by the year

2010, rural insurance business would constitute between 16-20 percent of

their total bancassurance new business premium.

Life insurers have also expressed overwhelming support to innovative

changes in the bancassurance channel, such as banks having multiple insurer

relationships, exclusive bancassurance products for deepening insurance

penetration and simpler training requirements for the bank staff to qualify as

insurance salespersons.

26
1.7 Research Design and Methodology

Research design is the arrangement of conditions for collection and

analysis of data in a manner that aims to combine relevance to the research

purpose with economy in procedure of data. It is a blue print specifying

every stage of action in the course of research. The research design adopted

in this study for secondary data is exploratory and analytical in nature.

Exploratory research aims to gain familiarity and new insights into any

phenomenon while analytical research aims at analyzing the current scenario

and thereby using that to project the future performance. It is concerned

with the research studies with a focus on the portrayal of the characteristics

of a group or individual or a situation. The main objective of such studies is

to acquire knowledge. In view of considerable data collected and presented

in this research report, descriptive research is considered to be the most

appropriate approach to the present study. The major purpose of

Descriptive research is the description of the state of affairs, as it exists at

present.

1.8 Secondary Data

The study mainly depends on published and unpublished secondary

data available with Insurance Regulatory Development Authority (IRDA),

27
the countries umbrella association of bancassurance. Some data required for

the study especially with regard to the banking sector in India were collected

from the published records, official circulars, business development and

research files, and pamphlets of Reserve Bank of India. The various reports,

records and booklets issued and maintained by leading private sector

insurers in India were also used in the study. The information was also

gathered by having informal discussion with the top officials of many

insurance and banking companies in India. The secondary data were also

collected from the standard text books of related topics, leading journals and

newspapers. Further, apart from analytical and applied analysis, empirical

tests have been carried out to quantify the results. This has made the study

theoretically more vigorous, academically exalted and practically valued.

1.9 Primary Data

The present study is an essential one based on the survey method. The

first hand data were collected from 300 people who did regular banking

transactions and also had insurance policies. The data were collected

through a interview schedule and personal observation. The data relating to

various problems encountered by the customers of bancassurance in India

and their perception about the bancassurance were gathered through the

28
interview schedule. A number of discussions were held with knowledge

persons such as, academicians, officials of the insurance and banking

companies for designing the interview schedule.

1.9.1 Construction of Interview Schedule

The variables to be studied were identified from various reports and

booklets published by the Reserve Bank of India and the Insurance

Regulatory Development Authority (IRDA), published articles, preliminary

discussions (pilot study) with some selected officials of the insurance

companies and banks. The interview schedule so drafted was circulated

among a few research scholars and field experts for a critical review with

regards to wordings, format, sequence and the like. It was redrafted in the

light of their comments. The interview schedule, accordingly prepared was

an undisguised structural data gathering instrument suitable for a personal

interview.

1.9.2 Pretest

The draft schedule for the pretest study deals with the perception of

the customers of bancassurance in Tamil Nadu. The draft schedule for the

present study encompassed three sections. The first section containing the

personal informations, the second, the perception of the customers regarding

29
the bancassurance and the third, the suggestion of the customers for the

improvement of bancassurance as a business. The pretest was conducted in

July August 2009, among 10 respondents belonging to Chennai. The draft

schedule was revised according to the requirements of the pretest. The

specimen of the interview schedule used for the present study is shown in

the appendix of the research report.

1.9.4 Field Work and Collection of Data

The field work for the present study was carried out personally by the

researcher himself. The survey was conducted in several stages from

October 2007 to March 2008 covering a period of 6 months. The opinions

and suggestions of the respondents on the topic under discussion were

elicited and recorded at the end of the schedule. Completed schedules were

checked immediately in order to avoid errors and bias.

1.10 Period of Study

The period covered by the study extends over SIX years from 2003-

04 to 2008-09.

30
1.11 Sampling Technique
Sampling may be defined as a selection of some part of an aggregate

or totality on the basis of which a judgment or inference about the aggregate

or totality is made.

A sampling design is a definite plan for obtaining a sample from the

given population. There are different methods of sampling. Here

Convenience sampling technique has been used.

This method of sampling involves selecting the sample elements

using some convenient method without going through the rigor of sampling

method. The researcher may make use of any convenient base to select the

required number of samples. Accordingly, four important cities of

TamilNadu namely Chennai, Ciombatore, Trichy and Madurai were selected

for the study.

The total numbers of 300 respondents were selected for the

convenience sampling.

1.12 Data Procesing and Tools of Analysis

After completing the schedule, editing of both primary and secondary

data was done. For further processing, the data were completely

31
computerized. In the study, to analyse and interpret the collected data,

tables, Percentage analysis, Trend and Growth Analysis have been primarily

used. The statistical tools are an integral part of any research analysis. The

analysis of data compiled by the researcher should be subjected to relevant

analysis, so that meaning full conclusion can be arrived at in this research

report. Correlation coefficient, Probability, Z-Test and Chi-Square Test have

been used to analyse the compiled data. The Percentage Analysis has been

used as the measure of central tendency to describe the relationships.

1.13 Problems and Limitations of the Study

Every research study suffers from errors and limitations. Some of

them are inherent in the research design, while some others become part of

the study during various stage of operations. The present study is subject to

the following constraints and limitations:-

1. The customers base of the bancassurance changes every year. Therefore,

for the present study, to understand the perceptions of the real customers
of bancassurance, the selection was made from the records of selective
banks situated at Chennai, Ciombatore, Trichy and Madurai. It is from
among these customers, 300 clients were selected only on the basis of
those having both a bank account and an insurance policy.

32
2. The data gathering instrument is another source of error. The interview
schedule used for this study despite pre-testing does remain a source of
error.
3. The banks and their insurance partners categorically refused to provide
any financial data particularly relating to the business of bancassurance.
Hence, the researcher could gather the details regarding the insurance
business from the Insurance Regulatory Development Authority (IRDA)
only. The details regarding the volume of business in bancassurance is
confined only to Life Insurance. The researcher could gather some
information regarding the business from business journals and
newspapers published on different dates.
4. As the research contains the secondary data for making an analysis, the
accuracy and reliability of the analysis depends on reliability of data
collected from various sources.
5. Time has played the biggest constraints that the research could not be
carried comprehensively as the duration of the study was a major
limitation.
6. The researcher could not obtain the data regarding the fee based income
on account of bancassurance business for the banks.
7. The study is mainly carried out from the customers view point, because
of time constraints the perception of the bank employees and the
insurance employees could not be studied and hence, they are excluded
from the study.
8. It has been the experience of the researcher that the data collection from
the real customers of bancassurance is very time consuming.
9. The clients are normally co-operative but in many cases they are not in a
position to spare for interview owing to their heavy schedule of

33
 engagements. Because of this, it was necessary to make atleast 2 to 3
trips to an individual to collect the required data. Besides, their
responses to the questions were subject to several distractions of an
unavoidable nature. Sometimes, the interview has to be terminated at a
critical stage to be followed up later in the day or the next.
10. The sample size for collecting the primary data was meager as it
includes only 300 respondents. It was infact, a hard task for the
researcher to identify these 300 respondents, because neither the banks
nor the insurance companies could give the complete details of their
customers. Probably they could not provide such data on account of the
confidential nature of the business.
11. Personal biases and prejudices of the customers may also affect the
study.

1.14 Scheme of Report

The present study entitled BANCASSURANCE THE INDIAN

EXPERIENCE has been organized into SIX chapters. The present chapter

identifies and states the problem of the study with a review of related

literature. It also deals with the research design including the objectives of

the study, scope of the study, collection of data, survey design, data

processing, period of study, problems and limitations of the study and the

organization of the research report.

34
 CHAPTER II titled BANCASSURACE _ A REVIEW presents an

account of the evolution and global development of bancassurance. This

chapter also portrays a clear picture of the concepts and mechanics of

bancassurance. The chapter also covers the various distribution models and

products of bancassurance. Thus, the conceptual framework of

bancassurance is completely examined in the chapter.

CHAPTER III entitled BANCASSURANCE IN INDIA gives a

clear picture regarding the evolution of bancassurance in India, the

bancassurance models and their business operations at the national level.

The chapter also highlights the synergy between the commercial banks in

India and their insurance partners for the promotion of bancassurance. The

chapter also devotes attention to the various legal framework formulated in

the country for the successful marketing of this innovative financial product.

CHAPTER IV captioned SWOT ANALYSIS OF

BANCASSURANCE IN INDIA sheds light on the Strength, Weakness,

Opportunities and Threads of bancassurance as a successful business model

in India.

35
 CHAPTER V under the heading PERCEPTION OF THE

CUSTOMERS devotes attention to the perception of the real customers of

bancassurance in India.

CHAPTER VI brings the research report to a logical conclusion by

highlighting the summery of the study with a view to obtaining answers to

the questions raised in the statement of the present research problems and by

providing valuable suggestions to the future dimensions of this novel

business model.

36
 CHAPTER II

BANCASSURANCE A REVIEW
2.1 Introduction

In todays financial market, consolidation has become a natural

corollary of changing client demands, technology and relaxation of financial

regulations across the globe. A survey carried by SIGMA (1992)1 reveals

that customers prefer one-stop financial shopping. The convergence of

Telecom and computation, and the progress made in technology itself is

making delivery of customized products possible, that too all from one

source. As a sequel, giant conglomerations of banking, insurance and

securities underwriting are dawning on financial markets. One such

resulting phenomenon is Bancassurance.

Bancassurance a term coined by combining the two words - Bank

and insurance connotes distribution of insurance products through banking

channels. Bancassurance has been defined as the Provision of distributing

insurance and banking products and services through a common distribution

channel to the same client base. It is basically selling insurance products

and services by leveraging the vast customer base of a bank and fulfilling

the banking and Insurance needs of the customers at the same time.

1
Murty G.R.K. 2001, Banks foray into Insurance: Adaptation challenges, The ICFAI Journal of applied
finance, VOL.7, No:3, PP. 80 to 97.

37
 Banks with their geographical spread and penetration in terms of

customer reach of all segments have emerged as a viable source for the

distribution of insurance products. Bancassurance covers a wide range of

detailed arrangements between banks and Insurance companies, but in all

cases it includes the provision of insurance and banking products or services

from the same sources to the same customer base2. Bancassurance takes the

various forms depending upon the demography, economic and legislative

climate of the country3. The demographic climate will determine the kinds

of insurance products. The economic climate will determine the trends in

terms of turnover, market shares etc. The legislative climate will decide the

periphery within which bancassurance has to operate. The motive behind

the bancassurance also differs. For banks it just acts as a means of product

diversification and additional fee income, for insurance company it acts as a

tool for increasing their market penetration and for customers it acts as a

bonanza in terms of reduced price, high quality products and delivery to

2
Hoggarth.G and E.Saportar, 2001, Costs of banking system instability: Some empirical evidence ,
Bank of England financial stability review, June, PP 32 -39.
3
Dasgupta,R. 2001, "RSA, Iffco-Tokio yet to appoint actuaries", Economic Times, January 23, PP 45-
47.

38
door steps. Hence, it is a win-win situation for all the parties involved in

Bancassurance.4

2.2 Benefits
Bancassurance is an important tool in the hands of bankers, insurers

and customers to maximize their benefits at a time. As everybody is a

winner in this system, their respective benefits are given below:-

2.2.1 From the viewpoint of Bankers

Bankers have the power and structure to relate to the customers

needs. This will enable them to enter in the area of bancassurance. In a

situation of constant asset base, the bank can increase Return on Assets

(ROA) by increasing their income, by selling insurance products through

their own channel. It can cover operating expenses and make operating

expenses profitable by leveraging their distribution and processing

capabilities.

The bankers have a branch network to make face to face contact with

the customers and a great deal of trust over the customers. By leveraging

the facilities, the bankers can guess the attitude and diverse needs of the

4
Kumari,V. A.Vaswati, 2001, "India Insurers Seek Perfect Partners." National Underwriters, March 5,
PP. 38-39.

39
customers and could change the face of insurance distribution to personal

line insurance.

Banks enjoy significant brand awareness within their geographical

region providing for a lower per head cost5. The advantage of a bank over

the traditional distributors of insurance is the lower cost per sales head,

which is made possible by their sizeable loyal customer base. Banks have

extensive experience in marketing to both existing customers and non-

customers. They also use technology access multiple communication

channels such as statement inserts, direct mail, ATMS, telemarketing etc for

the improvement in transaction processing and customer service6.

Bancassurance offers advantages to bankers by creating a universal

banking platform by offering a wider financial services package and

positioning the Bank as a one-stop-shop for all financial and protection

needs of customers. With customers getting more financially discerning in

nature, a wider product offering is critical for creating customer loyalty.

Bancassurance also offers a good opportunity to increase the Banks

share of the customers wallet through insurance cross sell. Banks may also

be able to garner fresh banking business by using insurance as a selling

5
Berman, P. 1996, "Rethinking Health Care Systems: Private Health Care Provision in India.", Harvard
School of Public Health Working Paper, November, PP. 62-64.
6
Mitra, Sumit,D. and H.Nayak, Shilpa, 2001,"Coming to Life.", India Today, May 7, PP 12-13.

40
hook. Bancassurance enables a Bank to satisfy the risk protection needs of

its clients without assuming the underwriting of risk.

Building an expensive distribution network is a major drain on the

bottom-line of a Bank. It is critical that these distribution points are

optimized by selling a larger range of products, including Insurance

products. The selling of insurance products provides bank employees with

new challenges and enhanced skills, thus improving their productivity and

efficiency. Banks can leverage their existing customer service and

operations, infrastructure and expertise to effectively service insurance

related processes as well.

2.2.2 From the view point of Insurer

The insurer can increase their volume of business through banking

distribution channel and gain better. The presence of a Bank partnership

brings about distribution diversification and places less reliance on

traditional revenue streams generated from the agency distribution channel.

It can solve the difficulties arising out of price competition which has driven

down the margins and increased the compensation demand of successful

agents. Bank partnerships provide a geographical reach to the insurer

through the banks existing network without significant investment in

infrastructure. In India specifically, the costs of network development in

41
far-flung areas would be prohibitive, and Bancassurance offers an ideal

solution to this problem7.

Banks have warm customer bases, which expect the banks to sell

other financial products to them. Conversion rates of bank customers are

expected to be higher than in alternate sales channels8. Through agents, the

insurer can only sell fewer and large policies to a more upscale client. The

middleclass income holders who comprise the bulk of bank customers get

very little attention from the agents. By using bank channel, the insurer can

capture much of its under served market9.

Banks possess financial and life stage information of customers,

which assists greatly in identifying and filling financial need gaps and

developing specially packaged products targeted at satisfying specific

customer needs. By cutting cost, insurer can serve better to the customers in

terms lower premium rate and better risk coverage through product

diversification. Insurance companies can greatly leverage from the brand

awareness and equity of Banks, thus enhancing customers receptiveness for

insurance products. Co-branding and joint marketing effort can greatly

increase product recognition and awareness in the mind of the customer.

7
Roy, A. 1997, "Pension fund business in India.", The Hindu, July 16, PP. 25.
8
Sinha, Tapen.R and D.Sinha, Dipendra, 1997, "A Comparison of Development Prospects in India and
China.", Asian Economies, Vol. 27(2), June, PP. 5-31.
9
Business Today. 2000,"The Monitory Group Study on Insurance I and II." , March 22 and April 7, PP.11-
12.

42
Existing operations and service infrastructure and expertise of banks provide

an ideal platform to service insurance customers acquired through the

Bancassurance channel.

2.2.3 From the customers view point

For customers, Bancassurance provides the convenience of dealing

with one financial institution for all financial needs. In an environment

where most adult family members are working and leisure time is at a

premium, customers are even willing to pay more for a one-stop shop.

Further, owing to the customers affinity towards the Bank, provision of

insurance through the bank offers a more credible solution. Customers also

benefit from service convergence between the Bank and insurer through a

common service point. Product innovation and distribution activities are

directed towards the satisfaction of the needs of the customer.

Bancassurance model assists customers in terms of reduced price,

diversified products, quality products and in time and doorstep service.

2.3 Bancassurance products

All life insurance products are by nature products which belong to the

wider financial services sector. For a bancassurance operation in particular,

however, the decision on the types of insurance products which it wants to

sell is very closely bound up with the methods of distribution which it plans

43
to use. This is because the effort and expertise needed to sell a given

product must be appropriate to the skills and cost base of the chosen

distribution method. A product which is very hard for the available

distribution channels to sell is not going to be successful for the operation,

whether in terms of sales volumes or of profits10.

Apart from the traditional insurance products, bancassurers have

developed special products in order to fulfill certain needs which emanate

from banking transactions, or to improve certain products in order to make

them more attractive and useful to the customer.

These products can be broken down into three categories:11

Finance and repayment products

Depositors products

Simple standardized package products

10
Sinha, Tapen,R. 2000, Pension Reform in Latin America and Its Implications for International
Policymakers,Boston, USA, Kluwer Academic Publishers, Huebner Series, Volume No. 23, PP 76- 79.
11
Patel, F. 2001 ,"Centre wants GIC to merge unviable outfits before recast.", Business Standard, April 13,
PP 12-13.

44
2.3.1 Finance and repayment products

The concept of this group of products is fairly simple. A financial

institution which grants loans or credit to individuals is concerned that, in

the case of early death or permanent disability of the borrower, the

outstanding loan or credit amount may not be recoverable. Along with the

financial loss, the lender also runs the risk of damaging its reputation among

customers, since it will acquire the reputation of repossessing items on the

unfortunate death of its clients, and the harassment of the unfortunate spouse

and family. The borrower, on the other hand, has similar concerns. He does

not wish to leave an outstanding loan to be repaid by his family after his

death. He is also concerned about his possible inability to repay the loan or

credit amount if he becomes permanently disabled. A category of products

that can satisfy both the parties is the finance and repayment product, the

best known of which are the following:

2.3.1.1Credit insurance

Credit insurance can be offered in cases where a loan is granted to the

customer and serves as additional security for the bank and financial

protection to the customer in the case of his death or permanent disability

prior to the repayment of the loan. This normally involves a decreasing

45
term life cover with an initial sum insured equal to the amount of the loan12.

The sum insured would decrease in line with the repayment of the loan

amount. Upon the death of the insured person, the amount payable would be

equal to the outstanding loan amount, with or without the accrued interest at

that time13.

If the outstanding loan amount decreases on a predetermined basis,

then it is possible to calculate the appropriate premium at the date on which

the loan was granted. In cases where the loan amount fluctuates according

to the needs of the borrower or due to fluctuations in interest rates, a

monthly premium based on the outstanding loan amount is a more equitable

solution, provided that the outstanding amount is available for calculating

the premium. Annual premium or single premium contracts can be offered

in cases where the loan amount at all periods can be predetermined. Where

the loan amount can fluctuate, single premiums are not permitted. In the

case where a single premium is charged, the premium amount is frequently

added to the loan amount. Almost all loans covered under credit insurance

schemes are of short repayment duration, i.e. up to 5 years14.

12
Sigma, 2000,. "World Insurance in 1999.", Published by SwissRe, July, PP. 32-46.
13
Crooks Gora, J. 1997, "Bancassurance: positioning for affiliations - lessons from Europe, Canada, and
the United States", LOMA Publications, Atlanta, May, PP. 64-78.
14
Raje, Pradeep,K. 2000, Where Did India Miss a Turn in Banking Reform? Is there a comeback?,
Center for the Advanced Study of India, CASI Working Paper, December, PP. 214-216.

46
 It is also possible for a bank to pay the premiums, which are very low,

and use this as a marketing tool in order to attract new customers and sell its

products more easily. The marketing tool is to offer free protection in the

case of death or permanent total disability. The bank will include the cost of

protection in the interest rate charged to borrowers.

Credit insurance is suitable for arrangements such as Mortgage loans,

Business loans, Personal loans, and Hire purchase arrangements. This cover

can also be issued as a group policy covering all customers. The master

policy remains with the bank and a certificate of insurance is given to each

customer.

2.3.1.2Overdraft insurance

Usually banks offer overdraft facilities to their customers. This is

automatic credit up to a pre-agreed amount. For salaried customers this

amount is usually two or three times their monthly salary. This facility has

no repayment term, provided the salary is deposited in the bank and the

credit always stays within the pre-agreed amount.

In the case where the customer who was using the credit facility dies,

this amount has to be repaid by the heirs of the deceased. This practice

usually creates problems for both the heirs and the bank. Overdraft

47
insurance is a real solution to this problem. Overdraft insurance can be

offered in two different ways:

a) The cover is equal to the credit facility used and a monthly premium is
paid according to this amount. In the case where the customer dies and
this credit facility has been used, the outstanding amount due will be
repaid to the bank by the insurance company.

b) The cover equals the maximum pre-agreed credit facility. In case of

death, the outstanding amount due will be repaid by the insurance
company. If there is an excess between cover and the outstanding amount
due, this amount will be paid to the heirs of the customer. Premiums in
this case can be paid on a monthly or annual basis.

In overdraft insurance, the premium is usually adjusted every year

according to the age of the customer. A maximum age for this benefit

usually exists. The premium can be paid by the customer or by the bank as

an offer to its customers.

This type of product is suitable for arrangements such as Overdraft

facilities, Credit cards, and Unstructured debts.

2.3.1.3 Capital repayment

For loans offered for mortgage, educational, personal or business

reasons a repayment scheme through an insurance policy is possible. The

48
customer is granted the loan and he pays to the bank only the loan interest.

He also takes out an endowment that has a cover equal to the loan amount

and with a duration equal to the repayment period of the loan. The premium

is selected so that the maturity payout is very likely to be able to cover the

full loan amount. The policy is always assigned to the bank and serves as a

repayment tool whether the customer survives or not. These products have

proved particularly attractive to customers in countries where life insurance

products enjoy favourable tax treatment, or where interest rates charged by

lenders on loans repaid by insurance policy proceeds are lower than for

capital repayment loans.

Due to the high investment element of these products, the premiums

for such products are much higher than those of the credit and overdraft

insurance.

These are simple protection products that directly relate to traditional

bank products and are sold with primary products such as mortgages, credit

cards, auto loans and personal loans. These products are cheaply priced and

guarantee repayment of the debt should the insured event occur. Being

simple products, the sales process involves minimal complexity, and is

typically sold en-mass bundled with the primary bank product.

49
2.3.2 Depositors products
The second category of these special products consists of the so-

called depositors products. The main types of depositors products are:

2.3.2.1 Depositors insurance

This benefit is designed to attract the public to deposit money with a

particular bank. It can be offered in all deposit accounts, but usually a

minimum deposit amount is required. The level of cover is usually

determined by factors such as price and underwriting. The premium in this

case is usually paid by the bank but it can also be paid by the depositor with

a proper marketing approach. The amount of cover is usually a multiple of

the cash balance in the deposit account. In the case of death of the

depositor, this cash balance is increased accordingly. As with depositors

insurance, accidental death cover is another option. Where reasonable limits

are set regarding maximum age and maximum amounts of coverage, this

product can offer attractive profit margins.

2.3.2.2 Objective achievement insurance (bank savings plans)

This policy can be offered in special deposit accounts where

systematic deposits are required to reach a predetermined objective amount

at maturity. However, if the depositor dies or suffers total permanent

disability, the difference between his objective amount and the cash balance

of the account is paid to the depositor or the depositors estate in addition to

50
the cash balance. In cases where the deposit amounts are not predetermined,

it is advisable to offer coverage that is a multiple of the average cash

balance amount during the preceding 6 or 12 months, so that problems of

antiselection can be reduced. However, it would still be possible for a

customer to increase the account balance rapidly and gain significant life

cover without underwriting.

2.3.2.3 Pure investment products

These products have no insurance elements, i.e. no risk. They have

traditionally been the domain of banks, but in some countries they enjoy

favourable tax treatment if they are offered by an insurance company15.

2.3.3 Simple standardized package products

These products are usually group policies which combine covers and

which cost the customer less than if they are bought individually16. These

products are usually sold over the counter by bank employees, so they need

to be uncomplicated. An example would be household insurance together

with waiver of premium on death cover. The objective of product

development in most cases is to offer the widest possible range of products

so as to enable the sales people to select the most suitable plan for each

15
Kaminsky, G. and S.Schmukler, (2002), "Short-Run Pain, Long-run Gain: The Effects of Financial
Liberalization, World Bank Working Paper, P.145.
16
Krishnamurthy, R. 2003, "Bancassurance in India", paper presented at the CEO Summit of Swiss
Reinsurance Company, April, PP. 45-48.

51
customers specific needs. A further range of products which the

bancassurer wants to offer to clients could include:

Whole life

Endowment

Unit-linked products

Term insurance products

Family income benefit

Waiver-of-premium benefit

Permanent total disability benefit

Income replacement benefit

Accident and sickness products

Hospitalization products

Pension products

2.4 Off the shelf products

Being specially packaged savings and protection plans targeted at

specific needs of customer segments; these products are parameterized and

require little consultation in the sales process, e.g., tax hedge plan. These

52
products can be effectively sold through the direct mail route and also across

the teller counters of the Bank.

2.5 Group products

These products are packaged for specific savings and protection

needs of certain groups, e.g., corporate employees. Being parameterized,

these pose little complexity in the sales process, and can be sold effectively

on the direct mail platform17.

2.6 Unit linked products

These products primarily aim to satisfy the investment needs of the

client and are a logical extension of other investment products sold by the

bank. They involve a need based selling exercise, and the sales process

follows a more complex and consultative approach. These products are best

sold through trained financial planners who are able to identify a complex

set of needs and offer a suitable solution to the customer18.

17
Sigma, 2002, "Bancassurance Development in Asia," Swiss Reinsurance Company, Augest, PP. 79-80.

18
Theron, M. 2003, "Insurance in India", paper presented at the CEO Summit of Swiss Reinsurance
Company, November, PP. 11-14.

53
2.7 Universal protection plans
These products address the risk protection needs of customers and

aim to adequately provide for the family of the insured should the insured

event occur. These products are also based on the individual financial needs

of the client, and are best sold through trained financial planners in a

consultative setting19.

2.8 Distribution Channels in Bancassurance

Traditionally, insurance products have been promoted and sold

principally through agency systems in most countries. With new

developments in consumers behaviours, evolution of technology and

deregulation, new distribution channels have been developed successfully

and rapidly in recent years. Bancassurers make use of the following

distribution channels:

2.8.1Career Agents
Career Agents are full-time commissioned sales personnel holding an

agency contract. They are generally considered to be independent

contractors. Consequently an insurance company can exercise control only

over the activities of the agent which are specified in his contract. Despite

this limitation on control, career agents with suitable training, supervision

19
Roy, S. 1999, "Insurance Sector: India.", Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, PP. 45-47.

54
and motivation can be highly productive and cost effective. Moreover, their

level of customer service is usually very high due to the renewal

commissions, policy persistency bonuses, or other customer service-related

awards paid to them.

Many bancassurers, however avoid this channel, believing that agents

might oversell out of their interest in quantity and not quality. Such

problems with career agents usually arise, not due to the nature of this

channel, but rather due to the use of improperly designed remuneration

and/or incentive packages20.

2.8.2 Special Advisers

Special Advisers are highly trained employees usually belonging to

the insurance partner, who distribute insurance products to the bank's

corporate clients21. Banks refer complex insurance requirements to these

advisors. The Clients mostly include affluent population who require

personalised and high quality service. Usually Special advisors are paid on a

salary basis and they receive incentive compensation based on their sales.

20
Houston, J. and M. Ryngaert, 1994, The overall gains from large bank mergers, Journal of Banking
and Finance 18 (6), PP. 115-117.
21
Houston, J. F., C. M. James, and M. D. Ryngaert, 2001, Where do merger gains come from? Bank
mergers from the perspective of insiders and outsiders, Journal of Financial Economics 60, PP. 285-331.

55
2.8.3 Salaried Agents

The salaried agents are being fully under the control and supervision

of bancassurers. These agents share the mission and objectives of the

bancassurers. Salaried Agents in bancassurance are similar to their

counterparts in traditional insurance companies and have the same

characteristics as career agents. The only difference in terms of their

remuneration is that they are paid on a salary basis and career agents receive

incentive compensation based on their sales22.

2.8.4 Platform Bankers

Platform Bankers are bank employees who spot the leads in the banks

and gently suggest the customer to walk over and speak with appropriate

representatives within the bank. The platform banker may be a teller or a

personal loan assistant and the representative being referred to may be a

trained bank employee or a representative from the partner insurance

company23.

Platform Bankers can usually sell simple products. However, the time

which they can devote to insurance sales is limited due to limited opening

22
Todd, J., and M. Murray, 1988, Banks in insurance: Increase or reduce competition?, Journal of
Insurance Regulation, PP. 518-537.
23
Carow, Kenneth A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP. 115-120.

56
hours and to the need to perform other banking duties. A further restriction

on the effectiveness of bank employees in generating insurance business is

that they have a limited target market, i.e. those customers who actually visit

the branch during the operating hours.

In many set-ups, the bank employees are assisted by the bank's

financial advisers. In both cases, the bank employee establishes the contact

to the client and usually sells the simple product whilst the more affluent

clients are attended by the financial advisers of the bank which are in a

position to sell the more complex products.

2.8.5 Set-up / Acquisition of agencies or brokerage firms

In the US, quite a number of banks cooperate with independent

agencies or brokerage firms whilst in Japan or South Korea banks have

founded corporate agencies. The advantage of such arrangements is the

availability of specialists needed for complex insurance matters and in the

case of brokerage firms, the opportunity for the bank clients to receive offers

not only from one insurance company but from a variety of companies. In

addition, these sales channels are more conceived to serve the affluent bank

client.

57
2.8.6 Direct Response
In this channel no salesperson visits the customer to induce a sale and

no face-to-face contact between consumer and seller occurs. The consumer

purchases products directly from the bancassurer by responding to the

company's advertisement, mailing or telephone offers. This channel can be

used for simple packaged products which can be easily understood by the

consumer without explanation24.

2.8.7 Internet

Internet banking is already securely established as an effective and

profitable basis for conducting banking operations. The reasonable

expectation is that personal banking services will increasingly be delivered

by Internet banking. Bancassurers can also feel confident that Internet

banking will also prove an efficient vehicle for cross selling of insurance,

savings and protection products. It seems likely that a growing proportion of

the affluent population will find banks with household name brands and

proven skills in e-business a very acceptable source of non-banking

products.

24
Rose Lawrence, C. and Dean G. Smith, 1995, Expansion into Insurance Product-lines and Bank
Shareholder Returns, Journal of Financial and Strategic Decisions, VOL 8, PP.13-25.

58
2.8.8 E-Brokerage

Banks can open or acquire an e-Brokerage arm and sell insurance

products from multiple insurers. The changed legislative climate across the

world should help migration of bancassurance in this direction. The

advantage of this medium is scale of operation, strong brands, easy

distribution and excellent synergy with the internet capabilities.

2.8.9 Outside Lead Generating Techniques

One last method for developing bancassurance involves "outside"

lead generating techniques, such as seminars, direct mail and statement

inserts. Seminars in particular can be very effective because in a non-

threatening atmosphere, the insurance counsellor can make a presentation to

a small group of business people, field questions on the topic, and then

collect business cards. Adding this technique to his/her lead generation

repertoire, an insurance counsellor often will be successful.

To make the overall sales effort pay anticipated benefits, insurers also

need to help their bank partners determine what the hot buttons will be for

attracting the attention of the reader of both direct and e-mail. Great

opportunities await bancassurance partners today and, in most cases, success

or failure depends on precisely how the process is developed and managed

inside each financial institution.

59
2.9 Distribution Models
Bancassurers have developed three basic distribution models:

Integrative, Specialist and Financial Planning model25.

2.9.1Integrative / Generalist Model

The integrative model distributes products through existing bank

channels, and in its most well-known European version, branch bankers

themselves sell insurance products to customers26. Theoretically, this offers

One Stop Banking and requires extensive training to branch staff. Bank

staffs are supposed to know the details of all the insurance products on offer.

Telemarketing and direct mail are also examples of integrative approaches.

2.9.2 Specialist Model

The specialist model distributes investment or other complex

insurance products through product experts who are generally employees or

representatives of the insurance company. Platform bankers identify

prospective customers who are then contacted by an insurance professional.

This process requires less training but requires higher compensation to

support the referral process. This model may not meet all of customers

25
Todd, J. and M. Murry, 1992, Bancassurance Is Strength To The Country?, Journal of Insurance
Regulation, PP.18-37.
26
Berger, A. N., D. B. Humphrey, and L. B. Pulley, 1996, Do consumers pay for one-stop banking?
Evidence from an alternative revenue function, Journal of Banking and Finance, PP.160-201.

60
needs since it lengthens the process of sale of even a simple insurance

product which can otherwise be sold across the counter.

2.9.3 Financial Planning Model

This method offers each customer a full financial planning package

addressing all of the individual's financial concerns, risk tolerances and

location in the cycle of life27. This process is beneficial for the customer, the

bank and the insurer. Bancassurers convey the message that they want to

know all about the customer in relation to their current and future financial

needs and want to assist them on all those aspects of their life.

To move a bank in the direction of becoming an effective user of the

financial planning model, the banks sales force first has to be taught how to

qualify prospects and make referrals and properly approach the customer.

This process will include and actively involve the bancassurers project in

charge who is best acquainted with pertinent regulations for the banks

geographic market area28.

27
Focarelli, D., F. Panetta, and C. Salle, 2002, Why do banks merge? Journal of Money, Credit and
Banking, PP. 47-66.
28
Ranade, A. and R. Ahuja (1999), Life Insurance in India : Emerging Issues, Economic and political
Weekly, January 16-22, Vol XXXIV, Nos 3 and 4. Mumbai, PP. 23-29.

61
2.9.4 Distribution Channels and Product Complexity
The design and implementation of the distribution model is as

important, if not more so, than product design in bancassurance (except for

the few clients who require customized product solutions for individual

financial planning needs). If an insurance or investment product offers basic

protection or the promise of reasonable return at a fair price, consumers will

buy it if the product, the distribution system and the channel are compatible.

Low penetration of insurance in emerging markets is not a failure of product

design, but a failure of the distribution system. The diagram below

demonstrates that products at varying levels of complexity require different

distribution channels and cost structures.

62
Relationship between product complexity and required sales effort

63
 As products become more customized, the complexity of the product

and the cost of distribution increases. As a result, the product and

distribution system must also change. Complicated estate or retirement

planning cannot succeed via direct mail, and it's not economically feasible to

sell only accidental death through an external agency force. In a traditional

sales environment, neither the company nor the agent can earn adequate

profits selling a low-premium product (such as accidental death) because

costs are too high. Conversely, a direct mail company can be enormously

successful selling an accident product with an average premium of only

$100, because the cost per solicitation can be kept low.

To be successful, the components of a distribution model must work

together; product features and benefits, distribution costs and marketing

channels all should complement each other. Bancassurers can tap all the

channels identified in the model: direct mail, telemarketing, platform

bankers, Internet, in-house specialists, Career Agents or professional

financial advisors. The most effective bancassurance strategies will be

driven by customers and channels and will leverage the bank's competitive

strengths.

64
 A customer and channel driven bancassurance strategy finds and

engages buyers where they are found. No attempt is made to impose a

preconceived product driven strategy29. Traditional life insurers are often

trapped: they create a product with features attractive to agents (such as high

commissions), and then let the agents find appropriate target markets. This

is a type of "top-down" product development approach. However, the bank

channel requires an analysis of the market that starts at the bottom, with the

customers, and works up.

A "bottoms-up" approach in bancassurance works differently. A

customer and channel-driven strategy capitalizes on the existing relationship

of trust and familiarity between the banker and branch customer and the

frequency of branch visits. In emerging markets, the lower-income

customers found in bank branches are usually wage-earners or small-

business owners - the same type of customers ignored by most insurance

agents. Visiting local branches frequently, these customers often develop

close relationships with branch managers or tellers. In developing markets,

these contacts are more frequent and personal and often come in the form of

visits to a branch to perform simple transactions such as funds deposits or

withdrawals.
29
Swiss Re, 2002, Bancassurance developments in Asia-shifting into a higher gear, Sigma
No.7/2002.

65
 The type of distribution channels that a company uses affects the

design and pricing of its products, as well as the way in which the products

are promoted and perceived in the marketplace. Some bancassurers started

out by selling simple products which could be sold in large volumes but

which usually had low margins to cover expenses and profits.

Many banks entered bancassurance with a defensive strategy in their

attempt to avoid market share erosion by insurance companies30. Very soon,

though, they realized that they could gain market share if they expanded

their product range, developed a sales culture within their organizations,

created a multi-channel distribution structure and exploited the potential of

the customer information that can enable the identification of customer

needs31.

2.10 Key Value Drivers

Which distribution model to use is a tactical decision secondary to

more basic strategic concerns. Bancassurance strategies should be driven by

markets and channels, encompass a broad range of tactics and practices, and

leverage the competencies of the bank and the insurer. They should identify

and build upon a discrete set of value drivers, those factors of such
30
Moshirian, F., 2001, International Investment in Financial Services, Journal of Banking and Finance,
PP. 317-337.
31
Carow, K. A., 2001, The Wealth Effects of Allowing Bank Entry into the Insurance Industry, Journal
of Risk and Insurance, PP. 129-150.

66
fundamental importance that to ignore any one of them could be fatal to the

success of the project32. The following four value drivers should be

considered in a bancassurance strategy:

2.10.1 Brand Equity

The strategy should leverage the bank's brand equity with consumers.

Consumers throughout the world rate bankers higher than insurance agents

in terms of such criteria as objectivity of advice and product knowledge. A

rationalized bancassurance strategy will build on the superior brand equity

of banks by integrating insurance into the bank product portfolio and

distribution infrastructure. For many customers, banks can become the

primary providers of financial services by supplying personal risk

management along with more traditional banking services.

2.10.2 Distribution
One of the key economic advantages of bancassurance is the savings

achieved through efficient utilization of the bank's existing distribution

channels. At some point in the development of a bancassurance operation,

the marginal cost of adding one more customer becomes negligible.

Bancassurers can reduce significantly the costs of agent recruitment,

selection and conservation. These savings can be passed on to consumers

through lower premiums, or the bank can maintain the premiums at market
32
Carow, Kenneth A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP. 115-117.

67
level in order to increase profitability. Because the lower and middle

segments of the life market are not price-sensitive, the second option is often

more desirable33.

2.10.3 Technology
Bancassurers should plan a technological infrastructure that will

exploit customer information found in the bank's database to uncover sales

opportunities and produce transactional simplicity for insurance customers.

The information that the banks have about their customers' buying habits,

economic status and money management practices constitutes a valuable

asset often unrecognized even by large, sophisticated banking institutions.

Using technology to order information about the economic behaviour of

customer segments can provide valuable insights about insurance-selling

opportunities. For instance, customers buying a home through a bank

mortgage can be approached for a variety of insurance products. With a

traditional insurer, behavioural information about policyholders is usually

unavailable, but even when known, can only be employed by agents (who

33
Fields,S., L. Paige, Donald, R. Fraser, and James W. Kolari, 2005, Whats Different About
Bancassurance? Evidence of Wealth Gains to Banks and Insurance Companies, PP.134-138.

68
have an economic interest in thwarting a direct relationship between the

company and the client)34.

Bancassurers should use technology to simplify the insurance

purchase as much as possible, thereby making the purchase an easier, more

pleasant experience and further differentiating themselves in the process.

Buying insurance in the traditional way means dealing with agents and the

complications of the underwriting process, which bancassurance can

eliminate. Branch customers are usually in a hurry and don't want to wait, so

banks will serve them best by simplification. With point-of-sale technology,

customers should be able to buy policies in a short time and leave the bank

with coverage in hand. Bancassurers should make the experience as positive

as possible, and technology can contribute greatly to this effort35.

2.10.4 Culture

An effective bancassurance strategy acknowledges the fundamental

cultural conflict between the bank and the insurance company by aligning

the bank's interests with those of the insurance company36. Without the

34
Lawrence C. and Dean G. Smith, 1995, Expansion into Insurance Product-lines and Bank Shareholder
Returns, Journal of Financial and Strategic Decisions, VOL 8, N0. 2, 13-25.
35
Wepler, John M., Thomas R. Linn and Patrick T. Linnet (2004), Banks in Insurance: A Five-Year
Retrospective since the Passage of GLB, Bank Director Magazine, 3rd Quarter, P 45.
36
Sreedevi Lakshmikutty and Sridharan Baskar, 2004, Insurance distribution in India- a
perspective, Insurance Chronicle, Domain Competency Group (Insurance), Infosys
Technologies Limited, PP. 25-26.

69
bank's total commitment to the insurance strategy, any bancassurance

program is doomed to fail. One of the more effective ways to achieve this

commitment is for the bank to have an equity interest in the insurance

company. With a stake in the financial results of the insurance operation, the

bank has a powerful in-centive to support the insurance strategy. The

alternative approach, buying "shelf space" in the bank to sell insurance

products, will rarely be as effective.

In any given situation, one of the four value drivers may greatly

outweigh the importance of the others. In some cases, solving the cultural

problem may loom especially large, while in others building an effective

technology platform may be paramount. Bancassurers will need to consider

all four, however, to achieve successful balance.

2.11 Bancassurance Models

Ultimately, a successful Bancassurance sales model is one that adds

value to the overall customer experience and exploits the respective skills of

the partners, thereby ensuring the longevity of the partnership37. The choice

of an appropriate model depends on key drivers, such as the level of

integration desired in the sales process, the existing organization structure of

37
Houston, J.F., C.M. James, and M.D. Ryngaert, 2001, Where do merger gains come from? Bank
mergers from the perspective of insiders and outsiders, Journal of Financial Economics, PP. 285-331.

70
the Bank, cultural differences between the two entities and the extent of

buy-in to the bancassurance culture coming from the top management.

Owing to the diversity across banks and insurers, there are no

prescribed sales models for specific partnerships that guarantee success.

However, broadly, sales models can be categorized as follows:

2.11.1 Separate Sales Force

In its most simple form, this model requires minimum integration

between the staff of the partners and merely utilizes the customer database

for insurance product prospecting. This model is unable to leverage the

customer knowledge and client relationships of the Bank staff38.

2.11.2 Hand In Glove

This model entails the sales force of the insurer utilizing the resources

of the Bank, such as the customer base, branch infrastructure and bank staff

expertise in the selling process. The bank employees sell simple packaged

products, but act as introducers in the case of more complex products. The

insurers financial planners undertake the consultative selling process and

final lead closure. This model exploits the client relationships and customer

information present with the banks employees and also leverages the

38
Thompson, S., 1997, Takeover activity among financial mutuals: An analysis of target characteristics,
Journal of Banking and Finance, PP. 37-53.

71
selling skills inherent in the sales staff of the insurer. It requires higher

interaction between the bank and insurers staff.

2.11.3 Fully Integrated

The insurance sales process is wholly owned by the Bank staff, while

the insurer acts only as a product and service provider. This model

maximizes the exploitation of the Banks strengths, but does not utilize the

skills of the insurer. Therefore, effective training and strong information

flow between the Bank and the insurer become the key drivers to the success

of this model. With little direct contact with the end customer, the insurance

company relies largely on the Bank for market information towards

identifying financial need gaps and developing suitable products.

The integrated model is by far the most successful bancassurance

business model and only under this model do banks achieve a dominant

market share. It is the most efficient model in terms of productivity. In this

model, bancassurers take full advantage of banks loyal customer bases and

of the sales capabilities of their large branch networks. In this model

bancassurers benefit from a clear cost advantage over traditional insurers.

72
 Sales are based more on branch staffs sales objectives than on an

analysis of the clients needs. Branch staffs life insurance training is

limited. Products are sold using simplistic sales messages. This could lead to

cases of mis-selling, especially as banks enter the individual pensions

market. It also makes it harder to sell more complex, higher added value

products.

2.11.4 Non-Integrated Model

This model is usually implemented when either regulation or tax

treatment does not allow a close integration of banking and insurance

activities.

In this model, banks life insurance products are usually offered by

specialized advisers on a more selective basis after performing a need

analysis. This model should therefore allow bancassurers to build a longer-

term relationship with clients by offering quality advice based on clients

needs and to sell higher value added products with higher margin.

Consequences of this approach are that business volumes are lower.

Because of this, and because of a lesser degree of integration between the

banking and insurance entities, bancassurers do not benefit from significant

cost differential compared with traditional insurers.

73
2.11.5 Open Architecture Model

This model can be implemented either because of regulatory

constraints (for example, obligation for banks to work with several

insurance providers) or to respond to customers demands by offering them

a greater choice of products.

Banks do not lock themselves into a single deal. They are in a

position to select the best insurance partners for each type of products, and

in some cases to have products specifically tailored to their needs and white-

labelled. Strong competition amongst insurers to get bancassurance

partnerships allows banks to get competitive products at attractive

commission levels. For insurance companies seeking a diversification of

their distribution strategy, this model offers opportunities to build on their

specific product capabilities to set up distribution partnerships with banks.

This model is less efficient than the integrated models in terms of costs as

the level of integration between the banks and the insurance companies

systems and processes is lower.

74
2.12 Ensuring Success

Many companies have failed while trying to implement a

Bancassurance strategy, and only a few have succeeded39. Although the

reasons for failure vary greatly, there are a few critical success factors that

contribute to a long standing and profitable partnership. It is essential for

both parties to understand that Bancassurance is a long-term alliance

requiring significant upfront investments before returns are realized. A

sophisticated Bancassurance model may take years to perfect before

payback of the initial investment.

Partners need to have a common business vision and direction

towards future objectives. Very often, partners have different expectations

from the alliance, which leads to early fallout in case the objectives are not

met. It is therefore critical for partners to develop a common business plan

with clearly laid out business goals and milestones. Top management

commitment to the alliance is critical to ensure staff buy-in downwards.

There should not be wide disparity in the core values of partners that

may lead to a conflict of interest in the course of business. For example,

market share orientation through price competitiveness and bottom-line

39
Fama, E. F., 1985, Wha ts different about banks?, Journal of Monetary Economics, PP. 29-36.

75
focus with no price-cutting could be divergent strategic alignments that may

cause conflict and jeopardize the partnership.

It is vital to integrate harmoniously the often dramatically different

bank and insurance cultures. Banks generally have a service oriented culture

as against insurance companies that have an aggressive need based selling

philosophy40. Staff resistance to a new product from an external provider,

remuneration disparity across bank and insurance staff, transition to a sales

oriented philosophy and presence of insurance staff in bank premises and

processes are a few challenges that such partnerships have to face to be

successful.

Partners must carefully select a sales model suited to the existing

organizational structure and culture of the Bank and insurer. Further, roles

within the model should be clearly defined to ensure process effectiveness.

Often, the absence of role clarity and cultural conflict undermine the

effectiveness of the sales model and lead to the failure of the venture.

Partners must also implement an insurance sales organization superimposed

on the existing structures of the Bank and insurer that defines roles,

40
Carow Kenneth .A, 2001, Citicorp-Travelers Group Merger: Challenging Barriers Between Bank and
Insurance, Journal of Banking and Insurance, PP.155-157.

76
responsibilities and reporting relationships of all people involved in

Insurance provision.

Partners must counter channel conflict that arises out of the Banks

customer base being exposed to an external entity. Confidential customer

information must be protected within the bancassurance channel, and should

not even be available to other channels used by the insurance company41.

An effective lead and customer ownership mechanism (e.g., Customer

Relationship Management Package) could minimize overlap between

Bancassurance and other channels used by the insurance company. It is also

essential to ensure that insurance products do not cannibalize other bank

products. This can be countered by offering suitable insurance products

positioned towards satisfying needs that are not met by other bank products.

A thorough understanding of products and a focus on needs based selling

would go a long way in solving this problem.

Process and service compatibility across the partners is critical. Bank

customers expect a certain level of service and a look-and-feel of service

that they have been used to in their interactions with the Bank. The Insurer

must gear up its service infrastructure and effectively integrate its processes

41
Carow Kenneth.A, 2001, The Wealth Effects of Allowing Bank Entry into the Insurance Industry,
Journal of Risk and Insurance, 68(1), PP. 129-150.

77
and systems with the Bank to deliver a similar customer experience. In a

bancassurance venture, quality customer service is even more important

because the bank refers its customers to the insurer, and the banks

relationship with the customer can be damaged by poor service from the

insurer.

2.13 Bancassurance - A Global Breakdown

It is important to outline the impact that bancassurance has had on

differing regions around the world, as well as looking at the major

regulations that impact the further growth of bancassurance. Below, is

provided with a brief synopsis of bancassurance markets in certain key

areas.

2.13.1 Europe

Bancassurance is a construct of Europe (France in particular) and this

perhaps helps explain why it is such a phenomenal success within certain

European markets. Largely the 1989 Second Banking Coordination

Directive motivated the large influx of banks into insurance within Europe

in recent years. Currently, the penetration levels are fairly stable in Europe,

since bancassurance in the majority of Western European countries (France,

Netherlands, Portugal and Spain) has reached a maturity level. These

penetration levels will only pick up once bancassurance manages to fully

78
infiltrate Central and Eastern European countries such as Hungary and

Poland, and the Baltic nations. Currently, the final major hurdle for

bancassurance in Western Europe seems to lie in the U.K., where a

predominantly strong insurance board still attempts to resist the

bancassurance trend even in the face of widespread deregulations42.

2.13.2 France

In France, the success of bancassurance is mitigated by a favorable

tax treatment on life insurance products, lack of competition within the

insurance industry, and an inadequate pension scheme (Bonnet and Arnal

(2000). The pioneer of bancassurance in France is argued to be Credit

Mutual, which created its own life and non-life subsidiaries in the early

1970s (Sakr (2001))43.

Bancassurance has seen the most success in the life insurance market,

something that is true for every nation, increasing from 52 percent in 1995

to account for 69 percent of life insurance business in 2000 (Durand (2003),

and Turner (1998)). However, as of late, the banking networks market

share of the life insurance market has remained fairly stagnant, actually

42
Ray, S. 2002, Bancassurance: The Revolution That Hasnt Come , Insurance Profewssional ,
PP. 45-47.
43
DeLong. G.L., 2001, Stockholder gains from focusing versus diversifying bank mergers, Journal of
Financial Economics Vol 59, PP. 221-252.

79
dropping over the years to 66 percent market share in 2001 and 61 percent

in 2003 (Falautona and Marsiglia (2003), Datamonitor (2003)). This

resulted from a combination of falling stock market prices and the banking

network bearing the brunt of lower transfer prices according to Benoist

(2002)44.

This means that banking and insurance companies are overseen

separately within the country. For a conglomerate, the regulator will depend

on who is the parent of the two.

2.13.3 United Kingdom

Bancassurers have faced a tougher time in trying to penetrate the U.K.

market, thanks in large to a combination of restrictive regulations and a

powerful insurance governing body. The first move for bancassurers came

in 1985 when Standard Life purchased a stake in the Bank of Scotland.

Changes in legislation soon followed in 1986 and 1988, which made it legal

for banks to market insurance products and set up their own insurance

subsidiaries (Sakr (2001)). Even then, the main type of union between the

two was a joint venture, since the banks placed an emphasis on maintaining

the knowledge of the insurer. Twenty years later, researchers argue that

44
Houston, J.F., M.D. Ryngaert , 2004, The overall gains from large bank mergers, Journal of Banking
and Finance Vol 18, PP. 115-117.

80
bancassurance is still in its infancy within the U.K., currently accounting for

15 percent of new insurance premiums issued (Benoist (2002)45.

It is argued that restrictive regulations were detrimental to the growth

of bancassurance within the country and that due to the lack of experience

the correct model for the U.K. is still to be found (Hubbard (spring 2001)).

The benefits of the regulatory system in the U.K. are, that it is based on one

almighty regulator that overseas the different factors of the financial

services industry (the financial Services Authority). This leads to more

streamlined regulations than in other countries that employ functional form

regulatory systems.

2.13.4 Spain

Spain has one of the most developed markets in bancassurance

(Datamonitor (2003)). Current penetration of bancassurers is over 75

percent of life insurance business and an ever-increasing proportion of the

non-life business. In Spain, the evolution of the bancassurance market is

fostered by the phenomenal growth within the insurance services industry

(life insurance alone has seen 30 percent growth per annum over the past 15

years (Durand (2003)). The development of bancassurance in the Spanish

market was facilitated by the well-established network of regional building

45
DeLong, G. L. 2003, The announcement effects of U.S. versus non-U.S. bank mergers: Do they
differ?, Journal of Financial Services Research, Vol 26, PP. 487-500.

81
societies, and also the cultural mentality that it is correct to take on risks

(Goddard (1999)).

2.13.5 Brazil

In Brazil the laws are infavour of bancassurers and the banks within

the country control more than 65 percent of the insurance market (Nigh and

Saunders (2003)), a size that rivals the leading bancassurers in Europe.

Furthermore, in Brazil, bancassurers are assisted by regulations that ban the

development of agent networks (Benoist (2002)).

2.13.6 North America

The North American financial services market is the largest in the

world and bancassurance has developed in a differing manner in this region

depending on the country in question. In Canada, there has been

consolidated regulation for more than 15 years and banks are legally

allowed to own insurance companies, but limitations are placed on the

products that can be provided (Dorval (2002)). In Mexico, bancassurance

has been a flourishing industry due largely to the role played by banks in the

creation of pension funds since the 1997 pension reforms46.

46
Andrade, G., M. Mitchell, and E. Stafford, 2004, New evidence and perspectives on mergers?, Journal
of Economic Perspectives, Vol 15, PP. 103-120.

82
United States

Bancassurance in the U.S. has, in contrast, faced a very tight

regulatory and legislative environment for many decades. The formation of

financial conglomerates was greatly hindered by the Banking Act of 1933

(Glass-Stegall Act) and the Bank Holding Company Act of 1956. Only in

1999 did laws become more favorable to banks offering insurance products,

with the passing of the Gramm-Leach Bliely Act. However, due to the

divergence between the state and federal laws regarding banks offering

insurance products, bancassurers still face a hard time ahead in relation to

regulations and attempting to overcome powerful lobbies that aim to

maintain existing hierarchies (Boot (2003)). Currently, only around 7

percent of Americans purchase their insurance products through bank

branches (Thomson (summer 2002b)). However, with the ever-continuing

regulatory changes such as the demutualization of insurance companies

coupled with an ageing population, it is widely believed that there will be

strong growth potentials for bancassurers in a mature market such as the

U.S47.

47
Fuller, K., J. Netter, and M. Stegemollar, 2003, What do returns to acquiring firms tell us?Evidence
from firms that make many acquisitions, Journal of Finance , Vol.57, PP 1763-1793.

83
2.13.7 Asia and the Pacific

Bancassurance in the Asian region has been relatively slow to take

off, with the exception of countries such as Australia, Hong Kong and

Singapore where regulations have been considerably lenient (Swiss Re.

(2002)). The trend in the majority of mainland Asian countries has been for

a bank to form ties with a foreign insurer in order to begin bancassurance

operations with around 80 percent of these being life insurers, and the

financial structure of the operation tends to be in the form of a distributional

agreement. Since bancassurance is still in its infancy in most Asian

countries, it is very susceptible to global changes48.

Most countries within Asia have only recently begun allowing the

formation of bancassurance operations with the main players listed below.

Certain countries within the region are still holding out against the onslaught

of the bancassurance trend. Vietnam still restricts banks from offering life

insurance products, while South Korea has made certain rules that make it

difficult to begin a bancassurance operation within the country.

48
Focarelli, D., F. Panetta, and C. Salle, 2002, Why do banks merge? , Journal of Money, Credit and
Banking Vol. 34, PP. 1047-1066.

84
 CHAPTER - III

BANCASSURANCE IN INDIA
3.1 INTRODUCTION

Insurance in the modern form was first set up in India through a

British company called the Oriental Life Insurance Company in the year

1818, followed by The Bombay Assurance Company in the year 1823 and

the Madras Equitable Life Insurance Society in 18291. They were insuring

the lives of Europeans living in India. Some of the companies that started

later did provide insurance for Indians. But, they were treated as

"substandard" and therefore had to pay an extra premium of 20 Percent or

more. The first general insurance company in India, Triton Insurance

Company Ltd., was established in the year 1850. It was owned and operated

by the British.

The first Insurance Company that had policies that could be bought

by Indians with "fair value" was the Bombay Mutual Life Assurance Society

which was started in 1871.The first indigenous general insurance company

was the Indian Mercantile Insurance Company Limited which was set up in

Bombay in the year 19072. By1938, the insurance market in India was

1
Krishnapani Kesiraj,L. (2003), Bancassurance an introduction, ICFAI Press, Hyderabad, June,Vol. XI,
PP. 45-52.
2
Krishnamurthy, R. 2003, Blueprint for Success Bringing bancassurance to India Irda Journal, New
Delhi ,December,Vol IX, PP. 20-23.

85
buzzing with 176 companies (both life and non-life)3. However, the industry

was plagued by fraud. Hence, a comprehensive set of regulations [Indian

Insurance Act, 1938] was put in place to stem this problem. By 1956, there

were 154 Indian insurance companies, 16 non-Indian insurance companies

and 75 provident societies that were issuing life insurance policies. Most of

these policies were centered in the cities (especially around big cities like

Bombay, Calcutta, Delhi, and Madras).In the year 1956, the Government of

India announced the nationalization of the life insurance business.

The nationalization of life insurance was justified mainly on three

counts. (1) It was perceived that private companies would not promote

insurance in rural areas. (2) The Government would be in a better position to

channel resources for savings and investment by taking over the business of

life insurance. (3) Bankruptcies of life insurance companies had become a

big problem (at the time of takeover, 25 insurance companies were already

bankrupt and another 25 were on the verge of bankruptcy)4.

3
Karunagaran, A. 2005, Towards Universal Banking in India Some Regulatory and Supervisory
Issues, IBA Bulletin, Special Issue 2005, January, Vol XXVII No 1, PP. 156-165.
4
Malpani Sudarshan,D. 2004, Many Roads to bancassurance IRDA Journal, IRDA, New Delhi,
August , Vol. I. No 9, PP. 26-27.

86
3.2 Life Story of the Life Insurance Corporation

The life insurance industry was nationalized under the Life Insurance

Corporation (LIC) Act of India 1938. In some ways, the LIC has become

very successful. Despite being a monopoly, it had some 60-70 million

policyholders5. Given that the Indian middle-class is around 250-300

million, the LIC has managed to capture about 30 percent of it6. Market

penetration in the rural areas has grown substantially. Around 48 percent of

the customers of the LIC are from rural and semi-urban areas7. This

probably would not have happened had the charter of the LIC not

specifically set out the goal of serving the rural areas.

One exogenous factor that has helped the LIC to grow rapidly in

recent years is the high saving rate in India. Even though, the saving rate is

high in India (compared with other countries with a similar level of

development), Indians exhibit high degree of risk aversion. Thus, nearly half

of the investments are in physical assets (like property and gold). Around

twenty three percent are in (low yielding but safe) bank deposits. In

5
Krueger, O .A. 2004, Banking Needs of Global Economy, Keynote Address, IBA Bulletin, Special
Issue 2005, January, Vol XXVII No 1, PP. 123- 145.
6
Ahuja Rajeev,C. 1999, Life Insurance in India : Emerging Issues, Economic and political Weekly,
Mumbai, January, Vol XXXIV, Nos 3 and 4, PP.16-22/ 23-29.
7
Rao, G .V. 2003, What Brokers Are ?, Irda Journal, IRDA, New Delhi, March, Vol. I. No 4,
PP. 43 -51.

87
addition, some 1.3 percent of the GDP are in life insurance related savings

vehicles8.

3.3 The General Insurance Corporation

Although efforts were made to maintain an open market for the

general insurance industry by amending the Insurance Act of 1938 from

time to time, malpractice escalated beyond control. Thus, the general

insurance industry was nationalized in 19729.The General Insurance

Corporation (GIC) was set up as a holding company. It had four

subsidiaries: New India, Oriental, United India and the National Insurance

companies (collectively known as the NOUN). It was understood that these

companies would compete with one another in the market. It did not happen.

They were supposed to set up their own investment portfolios. That did not

happen either. It began to happen after 29 years. The NOUN has kicked off

as an internal exercise to segregate the entire investment portfolio of the

GIC in the year 200110. The GIC has a quarter of a million agents. It has

8
Krishnamurthy, R. 2001, Bancassurance in Insurance Distribution: Key Issues in the Indian context,
FICCI seminar, October, Vol.X, PP. 23-27.

9
Rudolf Enz, H. 2000 ,The S-curve relation between per-capita income and insurance penetration,
Geneva Papers on Risk and Insurance: Issues and Practice, Volume 25, No 3, July, PP. 396-406.

10
Rajagopalan, R. 2004, Valuing the Term Insurance Products in the Indian Market, Paper presented at
the Fifth Global Conference of Actuaries, 25 January, New Delhi.

88
more than 2,500 branches, 30 million individual and group insurance

policies and assets of about USD 1,800 million at market value (at the end

of 2007)11. The GIC has so far been the holding company and re-insurer for

the state-run insurers. It reinsured about 20percent of their business12.

Although Indian markets were privatized and opened up to foreign

companies in a number of sectors in 1991, insurance remained out of bounds

on both counts. The government wanted to proceed with caution. With

pressure from the opposition, the government (at the time, dominated by the

Congress Party) decided to set up a committee headed by Mr. R. N.

Malhotra (the former Governor of the Reserve Bank of India) to look into all

the aspects of Insurance Industry in India.

3.4 Malhotra Committee

The committee was constituted for the following purposes; (a) to

suggest the structure of the insurance industry, to assess the strengths and

weaknesses of insurance companies in terms of the objectives of creating an

efficient and viable insurance industry, to have a wide coverage of insurance

services, to have a variety of insurance products with a high quality service,

11
Kumari,B., P.Vaswati, 2001,"India Insurers Seek Perfect Partners." National Underwriters, March 5,
2001ol 23 (1), PP. 38-39.
12
Mitra,A., F.Sumit and R.Nayak, 2001,"Coming to Life." India Today, May 7, Vol XXIV No.35, PP 7- 8.

89
and to develop an effective instrument for mobilization of financial

resources for development, (b) to make recommendations for changing the

structure of the insurance industry, for changing the general policy

framework etc, (c) to take specific suggestions regarding LIC and GIC with

a view to improve the functioning of LIC and GIC, (d) to make

recommendations on regulation and supervision of the insurance sector in

India, (e) to make recommendations on the role and functioning of

surveyors, intermediaries like agents etc. in the insurance sector, and (f) to

make recommendations on any other matter which are relevant for

development of the insurance industry in India. Liberalization of the Indian

insurance market was recommended in the report released in 1994 by the

Malhotra Committee, indicating that the market should be opened to private-

sector competition, and ultimately, foreign private-sector competition.13

The committee made a number of important and far -reaching

recommendations. The major recommendations are;

a) The LIC should be selective in the recruitment of LIC agents. Train these
people after the identification of training needs.

13
Berman, P. 1996,"Rethinking Health Care Systems: Private Health Care Provision in India." Harvard
School of Public Health Working Paper, November , Vol. 22 (3), PP. 23-34.

90
b) The committee suggested that the Federation of insurance Institute,
Mumbai, should start new courses and diploma courses for
intermediaries of the insurance sector.
c) The LIC and GIC should use the services of an MBA specialized in
Marketing.
d) It suggested that settlement of claims were to be done within a specific
time frame without delay.
e) The committee has several recommendations on product pricing,
vigilance, systems and procedures, improving customer service and use
of technology.
f) It also made a number of recommendations to alter the existing structure
of the LIC and the GIC.
g) The committee insisted that the insurance companies should pay special
attention to the rural insurance business.
h) In the case of liberalization of the insurance sector, the committee made
several recommendations, including entry to new players and the
minimum capital level requirements for such new players should be Rs.
100 crores (About USD 24 million). However, a lower capital
requirement could be considered for the entry of co-operative sectors' in
the insurance business.
i) The committee suggested some norms relating to promoters equity and
equity capital by foreign companies, etc14.

14
Roy, S. 1999, "Insurance Sector: India- Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, Vol No.XXX (2) PP. 168-184.

91
3.5 Mukherjee Committee

Immediately after the publication of the Malhotra Committee Report,

a new committee (called the Mukherjee Committee) was set up to make

concrete plans for the requirements of the newly formed insurance

companies. Recommendations of the Mukherjee Committee were never

made public. But, from the information that filtered out, it became clear that

the committee recommended the inclusion of certain ratios in insurance

company balance sheets to ensure transparency in accounting15. But the

government objected, on the ground that it could affect the prospects of a

developing insurance company.

3.6 Insurance Regulatory Act (1999)

After the publication of the report of the Malhotra Committee,

changes in the insurance industry appeared imminent. Unfortunately,

changes in insurance regulation could not pass through the parliament,

because of the instability of the central government. The dramatic climax

came in 1999. On March16, 1999, the Indian Cabinet approved an Insurance

Regulatory Authority (IRA) Bill that was designed to liberalize the

insurance sector. The bill was awaiting ratification by the Indian Parliament.

However, the then BJP Government fell in April 1999 and the deregulation
15
Sinha, T., and S. Dipendra, 1997, "A Comparison of Development Prospects in India and China." Asian
Economies, June, Vol. 27(2), PP. 5-31.

92
was put on hold once again. On December 7, 1999, the new government

passed the Insurance Regulatory and Development Authority (IRDA) Act16.

This Act repealed the monopoly conferred on the Life Insurance

Corporation in 1956 and the General Insurance Corporation in 1972. The

authority created by the Act is now called IRDA. New licenses are being

given to private companies. IRDA has separated out life, non-life and

reinsurance businesses. Therefore, a company has to have separate licenses

for each line of business. Each license has its own capital requirements

(around USD24 million for life or non-life and USD48 million for

reinsurance)17.

The insurance sector in India, which was opened up to private

participation in the year 1999, has completed almost eleven years in a

liberalized environment. Since opening up of the insurance sector in 1999,

23 private companies have been granted licenses and foreign investment of

Rs.1688.67 crore have been made into the Indian market18.

16
Graham, M., and R. Krishnamurthy, 2001, The Emergence of Alternative Distribution in India, Watson
Wyatt Worldwide, September, Vol. VXX, PP. 23-27.
17
Gurunath Singh,G. 2004, Emerging trends in banking and insurance sector Journal of Insurance
Professional , AUG, Vol. VII, PP. 26.
18
John O. Nigh and Mark V.T. Saunders, 2004, Bancassurance Around the World ,
Journal of Financial Services, PP. 34-37.

93
 Innovative products, imaginative marketing, and aggressive

distribution have enabled fledgling private insurance companies to sign up

Indian customers faster than anyone expected. While at the time of opening

up of the sector, life insurance was viewed as a tax saving device,

policyholders perspective is slowly changing and they are taking insurance

cover irrespective of tax incentives19. The insurable populace is looking for

avenues which are offering products which suit their specific requirements,

and plenty of choices are available in the market today.

By the end of March 2009, there are twenty two life and twenty one

non life Insurance Companies in India. The Life Insurance Corporation of

India is the only public sector company playing a predominant role in the life

insurance sector. However, there are twenty one private sector players who

are also actively involved in the life insurance business. There are twenty one

non life insurance companies as on 31st March, 2009, doing business in

India. Of the non life insurance companies, six are in the public sector and

the remaining fifteen are in the private sector. Among the public sector non-

life insurance companies, two are specialized insurance companies namely,

Agricultural Insurance Company, which handles crop insurance business and

Export Credit Guarantee Corporation (ECGC) which transacts export credit

19
Dr. N.Neelmegam, 2006, Insurance Distribution in India, Journal of Insurance Professional, May, Vol.
XIV, PP. 49-56.

94
insurance. There is only one company in India that too in the public sector,

doing re-insurance business. The table furnished below gives an account of

the number of registered insurers in India as on 31st march, 2009.

Table-3.1
Number of Registered Insurers in India as On 31.03 2008

Type of business Public Sector Private Sector Total

Life Insurance 1 21* 22

General Insurance 6* 15 21

Re-insurance 1 0 1

Total 8 36 44
Source: IRDA Annual Report 2008-09

With a large population and untapped market, insurance happens to be

a big opportunity in India. However, insurance penetration in the country

continues to be low. The level of penetration tends to rise as income

increases, particularly life insurance. India, with its huge middle class

households, has exhibited potential for the insurance industry. Saturation of

markets in many developed economies has made the Indian market even

more attractive for global insurance majors. The insurance market has

witnessed dynamic changes which includes presence of a fair number of

insurers in both life and non-life segment.

95
 Table-3.2
Life Insurance Companies Operating in India as on 31st March,
2009
Public Sector Private Players
1. Life Insurance 1. Bajaj Allianz Life Insurance Co. Ltd.
Corporation of
2. Birla Sun Life Insurance Co. Ltd. (BSLI)1
India (LIC)
3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
4. ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU)
5. ING Vysya Life Insurance Co. Ltd. (ING VYSYA)
6. Max New York Life Insurance Co. Ltd. (MNYL)
7. MetLife India Insurance Co. Pvt. Ltd. (METLIFE)
8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co. Ltd. (SBI LIFE)
10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)
11. Reliance Life Insurance Company Ltd.
12. Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)
13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance Co. Ltd (SHRIRAM LIFE)
15. Bharti AXA Life Insurance Company Ltd. (BHARTI
AXA)*
16. Aegon Religare Life Insurance Co. Ltd.
17. Canara HSBC Oriental Bank of Commerce Life Insurance
Co. Ltd.
18. DLF Pramerica Life Insurance Co. Ltd.
19. Future Generali India Life Insurance Co. Ltd.
20. IDBI Fortis Life Insurance Co. Ltd.Star Union Dai-ichi Life
Insurance Co. Ltd.

Source: IRDA Annual Report 2008-09

96
 Table-3.3
Non-life insurers Insurance Companies Operating in India as on
31st March, 2009

Public Sector Private Players

1. New India Assurance Co. Ltd.
(NEW INDIA)
2. National Insurance Co. Ltd.
(NATIONAL)
3. The Oriental Insurance Co. Ltd.
(ORIENTAL)
4. United India Insurance Co. Ltd.
(UNITED)
5. Export Credit Guarantee
Corporation Ltd
6. Agriculture Insurance Company of5. Royal Sundaram Alliance Insurance Co.
India Ltd. (AIC)
Source: IRDA Annual Report 2008-09
1. Bajaj Allianz General Insurance Co.
Ltd. (BAJAJ ALLIANZ)
2. ICICI Lombard General Insurance Co.
Ltd. (ICICI LOMBARD)
3. IFFCO Tokio General Insurance Co.
Ltd. (IFFCO TOKIO)
4. Reliance General Insurance Co. Ltd. (
RELIANCE)
Ltd.
(ECGC) (ROYAL SUNDARAM)
6. TATA AIG General Insurance Co. Ltd.
(TATA AIG)
7. Cholamandalam MS General Insurance
Co. Ltd. (CHOLAMANDALAM)
8. HDFC Chubb General Insurance Co.
Ltd. (HDFC CHUBB)
9. Star Health and Allied Insurance
Company Limited (STAR
HEALTH)**
10.Bharti AXA General Insurance Co. Ltd.
11. Future Generali India Insurance Co.
Ltd.
12. Raheja QBE General Insurance Co.
Ltd.
13. Shriram General Insurance Co. Ltd.
14. Universal Sompo General Insurance
Co. Ltd.
15. Apollo DKV Insurance Co. Ltd.

97
 The passage of the IRDA Act paved the way for a number of

Indian companies to seek the foreign partnership. In mid 2008, the

following companies have already setup insurance business with foreign

partners. The table exhibited below portrays the list of Indian companies

and their International partners jointly doing insurance business in

India20.

20
Tyler, J. and H. Leverty, 2006, Are synergies between banks and insurers huped? Evidence from
Citigroup-Travelers Divestiture, Virginia Commonwealth University, July, Vol.9 (2), PP. 109-111.

98
 Table-3.4

Indian Companies with Foreign Partnership

Sl.no Indian Partner International Partner

1. Alpic Finance Allianz Holding, Germany
2. Tata American Int. Group, US
3. CK Birla Group Zurich Insurance, Switzerland
4. ICICI Prudential, UK
Winterthur Insurance,
5. Sundar Finance
Switzerland
6. Hindusta Times Commercial Union, UK
7. Ranbaxy Cigna, US
8. HDFC Standard Life, UK
9. Bombay Dyeing General Accident, UK
10. DCM Shriram Royal Sun Alliance, UK
11. Dabur Group Allstate, US
12. Kotak Mahindra Chubb, US
13. Godrej J Rothschild, UK
14. Sanmar Group Gio, Australia
15. Cholamandalam Guardian Royal Exchange, UK
Group Legal & General,
16. SK Modi
Australia
17. 20thCentury Finance Canada Life
18. M A Chidambaram &Co Met Life
19. Vysya Bank ING

Source: U.S. Department of State FY 2008 Country Commercial Guide:

India

99
3.7 Life Insurance Business in India

The total business done by the life insurers in terms of the number of

policies issued as on 31stmarch,2009 accounts for more than 29 crores. Out

of this, Life Insurance Corporation of India, the only public sector Life

insurer has issued more than 88 percent of the policies. There are as many as

21 Private players in Life Insurance business, but all of them have issued

only a lesser number of polices (11.58 percent).This clearly highlights the

significance of the Life Insurance corporation of India in the Life Insurance

business in the country. The table below highlights the total business of the

Life Insurers in India in terms of number of policies as on 31st march, 2006.

Table-3.5

Life Insurance Business In force (Number of Policies)

In (`000)

Total Business as at Percentage to

Insurer
31.03.2009 Total business
Public sector insurer(LIC) 257823 88.42
Private Insurers 33795 11.58
Total 291618 100
Source: IRDA Annual Report 2008-09

Among the private insurers, BAJAJ ALLIANZ is the leading player

accounting for almost 23percent of the total number of policies issued by the

100
private insurers. This is followed by ICICI Prudential, which accounts for

little more than 19percent of the number of policies issued by the private

players.

Table-3.6
Life insurance Business in Force (Number of Policies)
(Private Insurers)
(In`000)
Total Business
Sl.No Name of insurers In Force As At % to Total
31.03.2009
1. BAJAJ ALLIANZ 7542 22.32
2. RELIANCE LIFE 3313 9.80
3. AVIVA 886 2.62
4. BSLI ( Birla SunLife) 2423 7.17
5. HDFC STD LIFE 2744 8.12
6. ICICI PRUDENTIAL 6449 19.08
7. ING VYSYA 1014 3.00
8. MNYL (Max NewYark Life) 2575 7.62
9. MET LIFE 645 1.90
10. KOTAK LIFE 951 2.81
11. SBI LIFE 2642 7.82
12. TATA AIG 1627 4.81
13. SAHARA 238 0.71
14. SHRIRAM LIFE 266 0.79
15. BHARATI AXA 226 0.67
16. FUTURE GENERALI 98 0.29
17. IDBI FORTIS 81 0.24
18. CANARA HABC 36 0.11
19. AEGON RELIGARE 23 0.07
20. DLF PRAMERICA 03 0.01
21. STAR UNION DAI-LCHI 13 0.04
Total 33795 100.00
Source: IRDA Annual Report 2008-09

101
 The situation is almost similar when we analyze the Life Insurance

business in terms of the sum assured by the players. The private players

have issued little less than 12percent of the total number of policies issued

by the Life Insurers, and their share in terms of the Sum Assured is also

13percent. Similarly, the only public sector Life Insurer (LIC) has assured

87percent of the total Sum Assured in the Life Insurance business as on 31st

march, 2009.

Table-3.7

Life Insurance Business in Force (Sum Assured)

(Rs. in Crore)

Total Business Percentage to Total

Insurer
as at 30.03.2009 Business

Public Sector (LIC) 2037531 87

Private Insurers 876172 13

Total 2913703 100

Source: IRDA Annual Report 2008-09

102
 The table furnished below gives an account of the business done by the

Private Life Insurers in terms of Sum Assured as at 31st march, 2009.

Table-3.8
Life insurance Business In Force (Sum Assured) (Private Insurers)
(Rs.In Crore)

Total Business
Sl.No Name of insurers In Force As At % to Total
31.03.2009
1. BAJAJ ALLIANZ 198477 22.65
2. RELIANCE LIFE 39431 4.5
3. AVIVA 24889 2.84
4. BSLI ( Birla SunLife) 84551 9.65
5. HDFC STD LIFE 69640 7.95
6. ICICI PRUDENTIAL 161595 18.44
7. ING VYSYA 18380 2.10
8. MNYL (Max New YarkLife) 82914 9.46
9. MET LIFE 36768 4.20
10. KOTAK LIFE 33874 3.87
11. SBI LIFE 55441 6.33
12. TATA AIG 44209 5.05
13. SAHARA 4013 0.46
14. SHRIRAM LIFE 6710 0.77
15. BHARATI AXA 5462 0.62
16. FUTURE GENERALI 2933 0.33
17. IDBI FORTIS 2682 0.31
18. CANARA HABC 2521 0.28
19. AEGON RELIGARE 1261 0.14
20. DLF PRAMERICA 78 0.01
21. STAR UNION DAI-LCHI 343 0.04
Total 876172 100.00
Source: IRDA Annual Report 2008-09

103
 Bajaj Allianz Ltd., is the leading player in the private sector doing life

insurance business. The company alone accounts for more than 22 percent

of the business done by the private insurers in terms of sum assured as on

31st march 2009. This is followed by ICICI Prudential which accounts for

little more than 18 percent of the business in terms of sum assured. The

Birla Sun Life Insurance Company and MNYL jointly share between

themselves another 20 percent of the business done by the private life

insurers.

The total amount of life insurance premium received by all the 21

private life insurers during a three year period commencing from 2006-07 to

2008-09 is presented in the following table.

104
 Table-3.9
Total life Insurance Premium (Private Insurers)
(Rs. In Crore)

Sl.No Name of insurers 2006-07 2007-08 2008-09

1. BAJAJ ALLIANZ 4302.74 9725.31 10624.52
2. RELIANCE LIFE 1004.66 3225.44 4932.54
3. AVIVA 1147.23 1891.88 1992.87
4. BSLI ( Birla SunLife) 1776.71 3272.19 4577.59
5. HDFC STD LIFE 2855.87 4858.56 5564.69
6. ICICI PRUDENTIAL 7912.99 13561.06 15356.22
7. ING VYSYA 707.20 1158.87 1442.28
8. MNYL (Max New YarkLife) 1500.28 2714.60 3857.26
9. MET LIFE 492.71 1159.54 1996.64
10. KOTAK LIFE 971.51 1691.14 2343.19
11. SBI LIFE 2928.49 5622.14 7212.10
12. TATA AIG 1367.18 2046.35 2747.50
13. SAHARA 51.00 143.49 206.47
14. SHRIRAM LIFE 181.17 358.05 436.17
15. BHARATI AXA 7.78 118.41 360.41
16. FUTURE GENERALI -- 2.49 152.60
17. IDBI FORTIS -- 11.9049 318.97
18. CANARA HABC -- -- 296.41
19. AEGON RELIGARE
20. DLF PRAMERICA -- -- 3.37
21. STAR UNION DAI-LCHI -- -- 31.21
22. PRIVATE SECTOR TOTAL 28253.00 51561.42 64503.22
23. LIC 127822.84 149789.99 157288.04
Total 156075.84 201351.41 221791.26
Source: IRDA Annual Report 2008-09

It is clear from the above table that the ICICI prudential tops the list

of private insurers who received the maximum amount of life insurance

premium. During the year 2006-07, ICICI Prudential received a sum of

105
rupees 7912.99 crores as the premium for insuring the lives of their

customers. The premium amount for the company has increased to rupees

13561.06 crores for the year 2007-08. During the year 2008-09, the

premium amount received by ICICI Prudential has reached the maximum of

rupees 15356.2 crores.

The second private life insurance company which received the

maximum amount of life insurance premium is Bajaj Allianz Limited. The

premium amount that the company has received increased from rupees

4302.7 crores in the year 2006-07 to rupees 10624.52 crore in the year 2008-

09. HDFC Standard life and SBI Life are the other two companies which

account for a high proportion of the amount of life insurance premium.

During the year 2006-07 the SBI Life received a sum of rupees 2928.49

crores as life insurance premium, whereas for the same period HDFC

Standard Life received a sum of rupees 2855.87 crores as the premium

amount. The difference in the amount of premium received by these two

companies is very marginal during the period 2006-7. When we look at the

amount of premium received by the same two companies during the year

2008-09, a considerable gap is noted. For the period, SBI Life has received a

sum of rupees 7212.10 crores which is more than almost 1750 crores of

rupees from what HDFC Life received during the period.

106
 The highlight of the table is that the premium received by all the 21

private insurers show a definite increasing trend during the three year

period. More than 100 percent growth is registered in many of the private

insurers including ICICI Prudential and Bajaj Allianz Limited.

Birla Sun Life, Max Newyark Life, Tata AIG, Aviva, Reliance Life

are the other leading private insurers who also receive a considerable

amount of life insurance premium.

3.8 Non-Life Insurance Business in India

It is generally the practice in the Insurance industry that the business

done by the Non-Life Insurance players are measured only in terms of the

Gross Direct Premium received by them.

During the year 2006-07, the share of the private players in the Non-

life insurance business is little when compared to that of the public sector

undertakings. All the private players put together had received a Gross

Direct Premium of only Rs.8646.57 crores. However, they have improved

their business over a period of time and by the year ending 2008-09, the

Gross Direct premium of the private sector players in the Non-Life

Insurance Business amounts to Rs.12321.09 crores. This clearly shows the

penetration of the private players into the non-life insurance business.

107
 Table-3.10

Non-Life Insurance Business in Force in Terms of Gross Direct

Premium

(Rs. In Crore)

Insurer 2006-07 2007-08 2008-09

Public Sector 17283.45 17813.71 19107.31

Private Sector 8646.57 10991.89 12321.09

Total 25930.02 28805.60 31428.40

Source: IRDA Annual Report 2008-09

The non-life insurance business in force in terms of the Gross Direct

Premium for the public sector insurance companies is exhibited in the

following table.

108
 Table-3.11

Non-Life Insurance Business in Force in Terms of

Gross Direct Premium for Public Sector Insurance companies

(Rs in crores)

Insurer 2006-07 % 2007-08 % 2008-09 %

National 3827.12 22 4021.97 22 4295.85 23

New India 5936.78 34 6151.97 35 6455.79 34

Oriental 4050.78 24 3900.22 22 4077.90 21

United 3498.77 20 3739.56 21 4277.77 22

Total 17283.45 100 17813.71 100 19107.31 100

Source: IRDA Annual Report 2008-09

109
 During the year 2008-09, New India insurance company is the leading

player in the public sector doing the nonlife insurance business in India. The

company alone accounts for about 34 percent of the total business in force

during the period. All other companies share the remaining business almost

in equal proportion. The total Gross Direct Premium received by all the four

players in the public sector on account of Non-Life Insurance business

shows an increasing trend. However, the growth is very marginal during the

first two years i.e., during the year 2006-07 the total premium was rupees

17283.45 and the same has increased to rupees 17813.71 crores in the next

year. The percentage increase was little higher in the next year from an

amount of rupees 17813.71 crores during the year 2007-08,the premium has

increased to rupees 19781.3 crores.

110
 The Non-life insurance business in force in terms of Gross Direct

Premium of private insurers is exhibited in the following table.

Table-3.12
Non-Life Insurance Business in Force
In Terms of Gross Direct Premium (Private Sector)
(Rs. In Crore)

Insurer 2006-07 2007-08 2008-09

Royal Sundram 598.20 694.41 803.36

Reliance 912.23 1946.42 1914.88

Iffco-Tokio 1144.47 1128.15 1374.06
Tata AIG 710.55 782.64 523.92
ICICI Lombard 2989.07 3307.12 3402.04

Bajaj Allianz 1786.34 2379.92 2619.29

Cholamandalam 311.73 522.34 685.44

HDFC Chubb 194.00 220.60 339.21
Future generali ---- 9.81 186.49
Universal sompo ---- 0.48 30.14
Shriram life ---- ----- 113.76

Bharati AXA ---- ----- 28.50

Total 8646.57 10991.89 12321.09

Source: IRDA Annual Report 2008-09

111
 The non-life insurance business in force for the private sector insurers

shows an upward trend during the period of study. In the year 2006-07, the

total business in force for the private insurers in the non-life sector was

rupees 8646.57 crores. The amount has increased to Rs 1099.89 crores in the

next year and for the year 2008-09, the total business in force for the private

insurers on account of non-life insurance business was recorded at

Rs 12321.09 crores.

Among all the private sector players, ICICI Lombord, Bajaj Allianz,

IFCO-TOKIO, Reliance and Royal Sundram are the major players doing

good business.

3.9 Bancassurance in India

Bancassurance or the joint offering by a bank and an insurance

company of their products within a single organization has flourished for

decades in the global markets. Actually, a fact that many do not know is that

bancassurance existed in a rather limited form in India, as well, before the

general insurance industry was nationalized in 1972, and even more so

before the nationalization of banks in 196921. Before this, a large number of

banks used their then-growing network to distribute products (Section 6 of

the Banking Regulations Act prohibits them from taking up full-fledged

21
Naveen, S. 2003, Bancassurance- an emerging concept in India- ICFAI Press Unoversity Vol. XXXIV
(9), PP. 56-61.

112
insurance business), though these were mainly general insurance products.

The product development and risk underwriting was done by their group

insurance companies (most of these banks were the old private sector banks

where the industry group they belonged to also had insurance companies in

their fold). And though bankers say that it is too much in the remote past to

quantify how lucrative this fee-based business actually was for them, it is

not too difficult to hazard a guess. Many of these products were sold on the

lines of a sort of captive business, insuring assets in companies that were

primarily financed by the banks themselves. It was only after the non-life

business was nationalized in 1972 and general insurance became the sole

prerogative of the General Insurance Corporation and its four subsidiaries

that banks were no longer allowed into the monopolistic sector.

With the increased structural deregulation within the financial system

and globalization ,the banking system in India has been exposed to tough

competition compelling them to move towards new vistas of business

activity under one roof by moving towards the universal banking

framework and eventually the emergence of financial conglomerate. Such

developments bring along some regulatory and supervisory concerns. Banks

have all along been functioning strictly on a traditional banking style with

highly compartmentalised manner. Now that the banking system enjoys

113
more of structural freedom exposing themselves to non traditional

activities such as insurance, derivatives, investments banking, etc., there is

possibility of migration of risks from the rest of the activities to the banking

system. Thus, the increased market integration and globalization are

demanding new realism on the part of the regulator and supervisor for

stricter prudential regulation. While it is inevitable that Indian banks

entering into insurance sector, given the size of the transactions in general

insurance transactions, coupled with the type of built-in risks on the one

side and that the banking system being the focal point of the payment and

settlement on the other, any migration from the former to the latter will have

a greater systemic implications22. Therefore adequate and appropriate

checks and balances are required to be put in place in time by all regulatory

authorities concerned.

The regulator of the insurance sector is of very recent origin unlike

the banking sector regulatory authority, namely Reserve Bank of India.

Banks are regulated by the Indian central bank, the Reserve Bank of India

(RBI).Therefore, the RBI has set down the rules for the entry of banks in the

field of insurance. In 1999, the Governor of the Reserve Bank of India

declared: "Presently, there is no provision in the Banking Regulation Act

22
Raje, P. 2000, Where Did India Miss a Turn in Banking Reform? Is there a comeback? Center for the
Advanced Study of India, CASI Working Paper, December Vol. XXV (3), PP. 78-83.

114
whereby a bank could undertake the insurance business. The Act may have

to be amended before banks could undertake insurance business.

Alternatively, there is a provision in the Banking Regulation Act whereby

banks could take any other form of business which the central government

may notify. Thus, if the central government notifies insurance business as a

lawful activity for a banking company, perhaps banks would be able to

undertake insurance business. It may, of course, be necessary to specify

what type of insurance business they could undertake23".

RBI had permitted banks to enter the insurance sector, as the

insurance business takes a longer time to breakeven. Banks dont have the

archival and technical expertise; they should be strong enough to withstand

the initial losses. Therefore, the Reserve Bank of India issued a set of draft

regulations to all the commercial banks and select financial institutions for

venturing insurance business.

3.10 RBI Guidelines for the Banks to enter into Insurance Business

Following the issuance of Government of India Notification dated

August 3, 2000, specifying Insurance as a permissible form of business

that could be undertaken by banks under Section 6(1) (o) of the Banking

23
Krishnamurthy, R. 2003, "Bancassurance in India," CEO Summit of Swiss Reinsurance Company, Vol
25, PP. 45-47.

115
Regulation Act, 1949; RBI issued the guidelines on Insurance business for

banks.

1. Any scheduled commercial bank would be permitted to undertake

insurance business as agent of insurance companies on fee basis, without

any risk participation. The subsidiaries of banks will also be allowed to

undertake distribution of insurance product on agency basis.

2. Banks which satisfy the eligibility criteria given below will be permitted

to set up a joint venture company for undertaking insurance business

with risk participation, subject to safeguards. The maximum equity

contribution such a bank can hold in the joint venture company will

normally be 50 per cent of the paidup capital of the insurance company.

On a selective basis the Reserve Bank of India may permit a higher

equity contribution by a promoter bank initially, pending divestment of

equity within the prescribed period.

The eligibility criteria for joint venture participant are as under:

i. The net worth of the bank should not be less than Rs.500 crore;

ii. The Capital Adequacy Ratio of the bank should not be less than 10 per

cent;

116
 iii. The level of non-performing assets should be reasonable; i.e the level

of NPA should be 1percent below the industrial average.

iv. The bank should have net profit for the last three consecutive years;

v. The track record of the performance of the subsidiaries, if any, of the

concerned bank should be satisfactory.

3. In cases where a foreign partner contributes 26 per cent of the equity

with the approval of Insurance Regulatory and Development

Authority/Foreign Investment Promotion Board, more than one public

sector bank or private sector bank may be allowed to participate in the

equity of the insurance joint venture. As such, participants will also

assume insurance risk, only those banks which satisfy the criteria given

in paragraph 2 above, would be eligible.

4. A subsidiary of a bank or of another bank will not normally be allowed to

join the insurance company on risk participation basis. Subsidiaries

would include bank subsidiaries undertaking merchant banking,

securities, mutual fund, leasing finance, housing finance business, etc.

5. Banks which are not eligible for joint venture participants as above, can

make investments up to 10percent of the net worth of the bank or Rs.50

117
 crore, whichever is lower, in the insurance company for providing

infrastructure and services support. Such participation shall be treated as

an investment and should be without any contingent liability for the

bank.

All banks entering into insurance business will be required to obtain

prior approval from the Reserve Bank. The Reserve Bank will give

permission to banks on case to case basis keeping in view all relevant

factors including the position in regard to the level of non-performing assets

of the applicant bank so as to ensure that non-performing assets do not pose

any future threat to the bank in its present or the proposed line of activity,

viz., insurance business. It should be ensured that risks involved in insurance

business do not get transferred to the bank and that the banking business

does not get contaminated by any risks which may arise from insurance

business. There should be arms length relationship between the bank and

the insurance outfit.

Insurance Agency Business/ Referral Arrangement

The banks (includes SCBs and DCCBs) need not obtain prior

approval of the RBI for engaging in insurance agency business or referral

arrangement without any risk participation, subject to the following

conditions:

118
i. The bank should comply with the IRDA regulations for acting as

composite corporate agent or referral arrangement with insurance

companies.

ii. The bank should not adopt any restrictive practice of forcing its

customers to go in only for a particular insurance company in respect of

assets financed by the bank. The customers should be allowed to exercise

their own choice.

iii. The bank desirous of entering into referral arrangement, besides

complying with IRDA regulations, should also enter into an agreement

with the insurance company concerned for allowing use of its premises

and making use of the existing infrastructure of the bank. The agreement

should be for a period not exceeding three years at the first instance and

the bank should have the discretion to renegotiate the terms depending on

its satisfaction with the service or replace it by another agreement after

the initial period. Thereafter, the bank will be free to sign a longer term

contract with the approval of its Board in the case of a private sector

bank and with the approval of Government of India in respect of a public

sector bank.

119
iv. As the participation by a banks customer in insurance products is purely

on a voluntary basis, it should be stated in all publicity material

distributed by the bank in a prominent way. There should be no linkage

either direct or indirect between the provision of banking services offered

by the bank to its customers and use of the insurance products.

v. The risks, if any, involved in insurance agency/referral arrangement

should not get transferred to the business of the bank.

Some confusion arose about interpreting these rules for all types of

financial institutions from the circular. Therefore, the RBI proposed a series

of amendments in March 2000. In addition to the entry of banks, the RBI

also laid down a set of guidelines for the entry of Non-Bank Financial

Companies (NBFC) into insurance business (June 30, 2000)24. There were

two critical differences in the requirements proposed for the NBFCs.

First, the capital adequacy ratio of the NBFC (applicable only to those

holding public deposits) should not be less than 12 percent if engaged in

equipment leasing/hire purchase finance activities and 15 percent if it is a

loan or investment company.

24
Karunagaran, A. 2005, Towards Universal Banking in India Some Regulatory and Supervisory
Issues, IBA Bulletin, Special Issue 2005, January, Vol XXVII No 1, PP. 145-160.

120
 Second, the level of nonperforming assets should be no more than 5

percent of total outstanding leased/hire purchase assets and advances. On

November 28, 2001, the same rules were extended to cover All India

Financial Institutions. Specifically the rules for these institutions were set at

the same level as the NBFCs noted above.

Some confusion still remained whether it was possible for the

financial institutions to accept fees for their services directly or not. The RBI

cleared their position in two separate circulars: one for the scheduled

commercial banks and the other for the other institutions. It also stated that

financial institutions should not adopt any restrictive practice of forcing its

customers to go in only for a particular insurance company25.

In the 2001 Report on Currency and Finance, the RBI laid down its

views in more concrete term. The Reserve Bank, in recognition of the

symbiotic relationship between banking and the insurance industries, has

identified three routes of banks participation in the insurance business, viz.,

(i) providing fee-based insurance services without risk participation, (ii)

investing in an insurance company for providing infrastructure and services

support and (iii) setting up of a separate joint-venture insurance company

25
Krishnapani, K. 2003, Bancassurance an introduction, ICFAI Press, Hyderabad, Vol . XX, PP. 24-45.

121
with risk participation. The third route, due to its risk aspects, involves

compliance to stringent entry norms. Further, the bank has to maintain an

arms length relationship between its banking business and its insurance

outfit. For banks entering into insurance business with risk participation, the

prescribed entity (viz., separate joint-venture company) also enables to

avoid possible regulatory overlaps between the Reserve Bank and the

Government/IRDA. The joint-venture insurance company would be

subjected entirely to the IRDA/Government regulations26.

The Insurance Regulatory Development Authority (IRDA) issued

circulars in January and February 2003 setting out the ground rules for

bancassurance. Now, the IRDA has also come up with guidelines pertaining

to referral arrangements with the banks.

Arising out of the notification of the monetary and credit policy by

RBI on October,2002 permitting banks to undertake referral business

through their network of branches for selling insurance products with prior

permission of IRDA and RBI, the insurance regulatory authority has been

receiving enquiries from insurance companies about IRDAs guidelines on

the subject. All insurers entering into agreements/ arrangements with banks

26
Krueger, O. A., 2004, Banking Needs of Global Economy, Keynote Address, IBA Bulletin, Special
Issue 2005, January, Vol XXVII, PP. 12-15.

122
under the referral fee model or renewing such agreements / arrangements

may take note that the following points form part of any agreements /

arrangements:-

1. The referral fee shall be for access to banks customer database and it

should not exceed the ceilings on agency commission prescribed

under the Insurance Act, 1938 and the IRDA regulations and shall

form part of acquisition cost of business and shall not form part of

management expense. This will include arrangements where bank

branches operating outside India are sharing customers base of NRI

account holders.

2. The participation by banks customers shall be purely on

voluntary basis and this should be stated prominently in all publicity

materials distributed by the bank and the insurance company. It

should also be clearly mentioned.

3. There should be no linkage either direct or indirect between the

provision of banking services by the bank to its customer and use of

the insurance products.

4. There should be no interest surcharge, concession dependent upon

non use\ use of the insurance service by the customer.

123
5. Any administrative \ management expenses to be incurred for

distributing literature and other information on insurance should be

brought out in the agreement. Information exchange should be

exclusively for the promotion of the business and not for any other

purposes during the validity of the government.

6. The bank will not be paid any referral fee for promotional campaigns.

7. The insurance company shall not provide any details of its customers

to the bank on account of confidential obligations.

8. The insurance company and the bank shall enter into a referral fee

arrangement based on a memorandum of understanding or an

agreement which needs to be filed with the authority.

9. The bank which enters into referral fee arrangements should not be

permitted to enter into any similar arrangements with more than one

life insurance Company or more than one general insurance company.

This is important to measure that a bank does not act defector as an

insurance agent or as an insurance broker without any license.

10. The insurance company should enter into a separate agreement with

the bank for allowing the use of premises and the use of existing

infrastructure of the bank and a copy of the same should be filed with

the authority. In no case the fee for such services rendered \ offered

124
 by the bank should be linked to premium and it should be on a flat

basis. Such fee shall not form part of acquisition cost of business.

11. All agreements should be for fixed period and should be with prior

approval of the boards of both the insurance company and the bank.

12. If a bank has already been licensed as an agent or an intermediary, it

cannot also enter into a referral arrangement.

13. The referral arrangement may be entered into with a bank for access

to its data base, the provision of physical infrastructure and for the

display of the Insurers publicity material.

14. All publicity material distributed by the bank and the Insurer has to

make it clear that

i) Bank customers participation is voluntary.

ii) The Insurance contract is between the Insurer and the Insured, not

the bank and the Insured.

iii) The referral arrangement is not an agent-principal relationship.

15. There is to be no link between the provision of banking services and

the use of insurance products.

125
16. The Bank can have only one referral arrangement with a life Insurer

and a general Insurer.

17. The referral fee paid by the Insurer is to be treated as an acquisition

cost.

18. There is to be a written agreement, filed with the IRDA, recording

the referral arrangement.

19. The referral fee is to be calculated as follows:

Business generated through referral

Maximum Total payout as Referral
arrangement as a % of Gross Premium
Fee as a % of Total Premium
Written
10% 5.50%
20% 11.00%
30% 16.50%
40% 22.00%
50% 27.50%
60% 33.00%
70% 38.50%
80% 44.00%
90% 49.50%
100% 55.00%

For single premium policies the referral fee is to be 10% of the single

premium.

126
20. Every referral agreement is to be for a fixed period.

21. The bank should comply with IRDA regulations for acting under

the referral fee arrangement and IRDA shall have the discretion to

apply its own criteria to reject or discontinue such arrangements.

The new regulations in India may not allow all banks and finance

companies to develop insurance products and take on insurance risk. Even

so, many will eventually tie up as correspondent banks with leading

corporate houses entering insurance, to provide them with a network and

enhance their own fee-based income27. In the process it becomes a win-win

situation for the customer in a liberalized regime, who can then issue

instructions to his bank to debit his premium directly from his account, or,

drop the premium cheque at a conveniently located collection box at a bank

branch instead of having to go to a far-off insurance company branch or risk

postal uncertainties to do that. But, although product-network symbiosis

brings these partners together as the examples above suggest there is much

more to it that keeps these alliances going for the most part. Ask any insurer

27
Rao, G. V. 2003, What Brokers Are ?, Irda Journal, March 2003, IRDA, New Delhi, Vol 7 No.3 Pp
56-61.

127
about the attractions of joining up with a bank and chances are that he would

point at their huge customer databases as much as at their network28.

The greatest competitive edge banks have over insurance companies

apart from large databases is the personal contact they have with their

clients--not to speak of first hand knowledge of their financial profile which

can be used to leverage the bancassurance business. For example,

knowledge about a housing loan taken from a bank or its housing finance

subsidiary can trigger off mortgage insurance, which is also the case in, say,

an auto loan. So, with such major strengths as these, storming the insurance

sector should be a walkover for banks29.

Of course, the mere fact that banks are in personal contact with their

clients and can access them, unlike insurance companies who typically

interact through intermediaries, is no doubt a major strength30. But that's

going to require an incredible degree of pro-active marketingit is naive to

expect that bank customers are inevitably going to walk up to the insurance

desk and ask for life covers themselves.

28
Burdon, V. 2002, Profiting from bancassurance: choosing the right route , Britannia Life Limited ,
October, Vol.67, PP. 25-31.
29
Ansari, H. 2000, India: An Industry in Transition, Asia Insurance Review, January, Vol XX, PP. 56-
74.
30
Kumar,V. and K. Manoj, 2000, Bancassurance, A New Buzzzword, Financial Express April ,
Vol.25, PP. 17-19.

128
 So, if bank techies have put their heads close together, there is also a

flurry of activities amongst insurance project heads to plan for better co-

ordination between the product division, marketing and treasury than banks

by themselves have ever shown. It is a universally known fact that insurance

companies rake in their profits not from premium, but from investment. For

example, if a bancassurer is coming out with a 10 year product, not only

would the product division have to analyze the premium expected over a 10

year period in co-ordination with marketing; the treasury would also have to

know about cash flows, a major challenge for Indian banks. The prospects

of metamorphosing into financial conglomerates or, even of raking in good

fee-based incomes makes the game seem worth much more than the

candle31.

On December 28, 2000, the State Bank of India (SBI) announced a

joint venture partnership with Cardif SA (the insurance arm of BNP Paribas

Bank). This partnership won over several others (with Fortis and with GE

Capital). Many experts in the industry have awaited the entry of the SBI. It

was well known that the SBI has long harbored plans to become a universal

bank (a universal bank has business in banking, insurance and in security).

31
Kumar,V. and K. Manoj, 2003, Bancassurance, A House of Journal Of Oman Insurance Company,
Dubai, December, Vol.XXVI, PP. 56-87.

129
For a bank with more than 13,000 branches all over India, this would be a

natural expansion.

In the first round of license issue, the SBI was absent. There were

several reasons for this delay:- First, the SBI was seeking a foreign partner

to help with new product design. Second, it did not want the partner to

become dominant in the long run (when the 26 percent foreign investment

cap is eventually lifted). It wanted to retain its own brand name. Third, it

wanted a partner that is well versed in the universal banking business. This

criterion ruled out an American partner where underwriting insurance

business by banks has been strictly forbidden by law (although with the

passage of the Gramm-Leach-Blily Act, this is not quite as drastic as

before). Cardif is the third largest insurance company in France. More than

60 percent of life insurance policies in France are sold through the banks.

Fourth, the Reserve Bank of India (RBI) needed to clear the participation by

the State Bank Of India (SBI) because in India banks are allowed to enter

other businesses on a case by case basis.

The entry State Bank Of India (SBI) was groundbreaking for several

reasons. This was the first for an Indian bank to enter the insurance market.

Second, even though the regulators have said that banks would not

(generally) be allowed to hold more than 50 percent of an insurance

130
company, the SBI was allowed to do so (with a promise that its share would

be eventually diluted)32. Ever since the entry of the SBI, a number of other

insurance companies have declared their desired banking partners. In this

process, both life and non-life companies have tied up with banks. These

alliances are listed in the following table

32
Reserve Bank of India, 2001, Report of the committee On Customer Service in Banks, Indian Banks
Association, Mumbai, Vol. XXXIV, PP.156-172.

131
 TABLE 3.13

BANCASSURANCE ALLIANCE

Sl.No. Life Insurance Company Banking Partner

1. HDFC Standard Union Bank of India, Indian Bank,
HDFC Bank
2. ICICI Prudential Federal Bank, ICICI Bank, Bank of India,
Punjab & Maharashtra Cooperative Bank,
Allahabad Bank, South Indian Bank,
Citibank, Lord Krishna Bank, Goa State
Co-operative Bank, Indore Paraspar Sahakari
Bank, Manipal State Co-operative Bank and
Jalgaon Peoples Co-operative Bank,
Shamrao Vithal Co-operative Bank.

3. Birla SunLife Citibank, Deutsche Bank, IDBI Bank,

Development Credit Bank, Bank of
Rajasthan, Bank Muscat, Catholic Syrian
Bank Ltd, Andhra Bank, Karur Vysya Bank
Ltd.

4. Tata AIG HSBC, Citibank, IDBI Bank, Union Bank of

India.
5. Old Mutual KM None
6. SBI Life SBI , BNP Paribas
7. ING Vysya Vysya Bank, Bharat Overseas Bank
8. Allianz Bajaj Standard Chartered Bank, Syndicate Bank
9. MetLife Dhanalakshmi Bank , J&K Bank, Karnataka
Bank
10. AMP Sanmar Manjeri Cooperative, Perunthalmanna Bank ,
Nilambur Bank (all Kerala based).
11. Aviva ABN Amro, American Express, Canara
Bank, Lakshmi Vilas Bank
12. LIC Corporation Bank, Oriental Bank of
Nedungadi Bank, Central Bank of India,
Indian Overseas Bank, and Bank of Punjab,
Vijaya Bank, Centurian Bank, The City
Union Bank Ltd, Repco Bank

132
 Sl.No. Nonlife Insurance Banking Partner
Company
1. Bajaj Allianz Bank of Punjab, Bank of Rajasthan, Jammu
& Kashmir Bank, Karur Vysya Bank, Lord
Krishna Bank, Punjab & Sind Bank,
Shamrao Vithal Co-operative Bank,
Karnataka Bank.

2. Royal Sun Alliance Citibank, ABN Amro, Standard Chartered,

American Express, Repco Bank, SBI- GE,
Karur-based Lakshmi Vilas Bank

3. Tata AIG HSBC, IDBI, Development Credit Bank,

Union Bank of India.

4. IFFCO Tokio Not formally tied up with any banks as yet.

5. ICICI Lombard ICICI Bank and others in the pipeline.
6. Reliance Not formally tied up with any banks as yet.
7. United India Punjab National Bank; Andhra Bank,
Dhanalakshmi Bank Indian Bank, South
India Bank, Federal Bank.

8. New India Union Bank of India ,SBI, Corporation

Bank, and United Western Bank
.
9. Oriental Department of Posts, Oriental Bank of
Commerce, State Bank of Saurashtra.

Information updated from newspaper sources and websites of the respective banks and
insurance companies (March 11, 2008).

A number of interesting facts emerge from the table. The first obvious

feature of Table no.3.13 is the natural partnerships in the list. Specifically,

HDFC Life Insurance is tied with HDFC Bank, ICICI Prudential with ICICI

Bank and so on. The second striking feature of the table is the proliferation

of banks partnering with single insurance companies. Given that there are

133
only two dozen insurance companies and hundreds of banks, this outcome is

to be expected. Moreover, insurance companies are targeting different

market segments by affiliating with banks that do niche banking. Take the

example of Aviva. Aviva has evolved a three-layered strategy. The first

layer is a tie-up with ABN Amro and American Express. It caters to high net

worth urban customers. The second layer is a tie up with Canara Bank.

Through this nationalized bank with 2,400 branches, it reaches customers

across the length and breadth of the country. The third layer, at a regional

level, a tie-up with Lakshmi Vilas bank focuses on the region specific

customers. This tie-up helps them reach customers in rural and semi-urban

centers in Tamil Nadu and Andhra Pradesh. The third feature is best

illustrated by an example.Allianz Bajaj does not have the same banking

partners for the life sector as in the non-life sector. These two lists do not

match. The same is true for several other companies. Fourth, some banks

appear to have tied up with several insurance companies. For example,

Citibank appears in the list of a number of life as well as in the non-life

insurance company lists. This fact will become important as the warning of

the RBI that banks should not adopt any restrictive practice of forcing its

134
customers to go in only for a particular insurance company become an

issue in the future33.

Fifth, the exciting addition to the list is the Oriental Insurance

Company. In January 2004, it declared that it would distribute insurance

policies through the post offices after it announced a joint venture with the

Department of Posts. Given that the post offices have unprecedented reach

around the country with 155,600 branches, it could distribute policies to the

customers even in very remote areas34. The Department of Posts is the only

institution with a reach bigger than the banks in India.

There are several other banks in the pipeline for the approval of the

IRDA. They include the Punjab National Bank, the Principal Group and

Vijaya Bank. Two of them are well-established banks in India. The Principal

Group, an international financial institution, is mainly in pension business

around the globe35. In India, it is likely to enter in a partnership with a bank

with national distribution network in order to ramp up pension products

since the pension became deregulated in India.

33
Raj Singh, H. 2002, Report of the Committee on Banking Sector Reforms, Government of India ,June
Vol. XXXXI PP. 234-251.
34
Meera Sharma, R. 2001, NPA Management Redefined, Indian Management, February, Vol. 40 (2), PP.
63-70.
35
Barman, R.B. and G.P Samanta, 2001, On efficiency of Indian stock market: A Statistical
reevaluation, IJAF, July, Vol. 7, PP.17-28.

135
 The latest group to receive an outright charter for operating insurance

operation is Sahara Group (on March 5, 2004). Saharas entry is notable for

two important reasons36. First, Sahara is the only company to enter the

Indian market without any foreign partner. It thus becomes the only purely

domestic company to be granted a license to operate in the insurance sector.

Second, it operates the largest Non-Bank Financial Company in India. It has

over 50 million depositors. To put it differently, one in every 20 Indians has

an account with Sahara. It serves the country through 1,700 establishments.

Since the company is diversified, it can use multiple channels for

distribution of its product not the least through its NBFC capacity.

3.11 The Bancassurance Model in India

In India there are only 3 bancassurance models that are practically

followed by banks and insurance companies.37 They are (1) Referral

Arrangement and (2) Corporate Agency Arrangement (3) Joint Venture

Agreements.

36
Murty, G. R .K. 2001, Banks Foray in to Insurance: Adaption Challenges, The ICFAI Journal Of
Applied Finance, Vol. 7 (3) , PP. 80-97.
37
Tapen Sinha, S. 2002, Bancassurance in India: Who is tying the knot and why, SSRN Publication,
Vol. XXXIV, PP. 24-27.

136
3.11.1 Referral Model

Banks intending not to take risk could adopt referral model wherein

they merely part with their client data base for business lead for

commission. The actual transaction with the prospective client in referral

model is done by the staff of the insurance company either at the premise of

the bank or elsewhere. Referral model is nothing but a simple arrangement,

wherein the bank, while controlling access to the clients data base, parts

with only the business leads to the agents/ sales staff of insurance company

for a referral fee or commission for every business lead that is passed on.

In fact a number of banks in India have already resorted to this strategy to

begin with. This model would be suitable for almost all types of banks

including the RRBs and cooperative banks and even cooperative societies

both in rural and urban. There is greater scope in the medium term for this

model. For banks to begin with, resorts to this model and then move on to

the other models.

3.11.2 Corporate Agency

The other form of non-risk participatory distribution channel is that of

corporate agency, wherein the bank staff is trained to appraise and sell the

products to the customers. Here the bank as an institution acts as corporate

agent for the insurance products for a fee/ commission. This seems to be

137
more viable and appropriate for most of the mid-sized banks in India as also

the rate of commission would be relatively higher than the referral

arrangement. This, however, is prone to reputational risk of the marketing

bank. There are also practical difficulties in the form of professional

knowledge about the insurance products. Besides, resistance from staff to

handle totally new service/product could not be ruled out. This could,

however, be overcome by intensive training to chosen staff packaged with

proper incentives in the banks coupled with selling of simple insurance

products in the initial stage. This model is best suited for majority of banks

including some major urban cooperative banks because neither there is

sharing of risk nor does it require huge investment in the form of

infrastructure and yet could be a good source of income. Bajaj Allianz stated

to have established a growth of 325 per cent during April-September 2004,

mainly due to bancassurance strategy and around 40% of its new premiums

business (Economic Times, October 8, 2004)38. Interestingly, even in a

developed country like US, banks stated to have preferred to focus on the

distribution channel akin to corporate agency rather than underwriting

business. Several major US banks including Wells Fargo, Wachovia and BB

&T built a large distribution network by acquiring insurance brokerage

38
Tapen Sinha, S. 2002, Privatisation of the Insurance Market In India: From the British Raj to Monopoly
Raj To Swaraj, CRIS, June, Vol. XXXI, PP.45-87.

138
business. This model of bancassurance worked well in the US, because

consumers generally prefer to purchase policies through broker banks that

offer a wide range of products from competing insurers (Sigma, 2006)39.

3.11.3 Insurance as Fully Integrated Financial Service/ Joint

ventures

Apart from the above two, the fully integrated financial service

involves much more comprehensive and intricate relationship between

insurer and bank, where the bank functions as fully universal in its operation

and selling of insurance products is just one more function within. Where

banks will have a counter within to sell/market the insurance products as an

internal part of its rest of the activities. This includes banks having a wholly

owned insurance subsidiaries with or without foreign participation. In Indian

case, ICICI bank and HDFC banks in private sector and State Bank of India

in the public sector, have already taken a lead in resorting to this type of

bancassurance model and have acquired sizeable share in the insurance

market, also made a big stride within a short span of time. The great

advantage of this strategy being that the bank could make use of its full

potential to reap the benefit of synergy and therefore the economies of

scope. This may be suitable to relatively larger banks with sound financials

39
Krishnamurthy, R. 2001, Bancassurance in Insurance Distribution- Key Issues In The Indian Context,
FICCI Seminar, October, Vol. 27, PP. 51-53.

139
and has better infrastructure. Internationally, the fully integrated

bancassurance have demonstrated superior performance40. Even if the

banking company forms as a subsidiary and insurance company being a

holding company, this could be classified under this category, so long as the

bank is selling the insurance products along side the usual banking services.

For Insurers based on the business strategy and the number of tie-ups,

the contribution of bancassurance in India varies. The bancassurance has

emerged as a very important channel for distributing Insurance products.

The bancassurance channel accounts for about 35 percent of the total new

premiums collected by the Industry in India41. SBI Life Insurance Company

and Aviva Life Insurance are the two major players with nearly a two third

or more of their premiums coming from the bancassurance segment. For

SBI Life Insurance Company, bancassurance continues to be an important

distribution channel and it currently contributes about 69 percent of their

business. Out of the new business premium of Rs.482 crore, during the year

2004-05, the company could achieve 67 percent of this business through

bancassurance. The SBI Life Insurance could manage the same level of

business through bancassurance even during the financial year 2008 2009,

40
Rajmohan, S. 2008, Bancassurance in Emerging Markets Building Perspective Partnerships,
Insurance Chronicle, Vol. XXVI, PP. 23-31.
41
Bala Krishna,P. 2001, Banks Get Into Insurance, Indian Infrastructure, ICFAI PRESS, March, Vol. 3,
PP. 21- 25.

140
wherein almost 69 percent of the new premium come from the

bancassurance channel.

Aviva Life Insurance Company has tie-ups with close to 40 banks.

This includes foreign, private, public sector, co-operatives and Regional

rural banks. With these tie-ups supplementing their own branches, Aviva

Life Insurance Company has access to close to 30 million potential

customers and is present in close to 3000 locations in more than 1100 towns

and cities across the country42. Bancassurance contributed almost 65 percent

of the companys total new business premium of Rs192 crore, during the

year 2004-2005. The bancassurance channel still contributes 68 percent of

the total new business premium of the company in the year 2008 2009.

Birla sunlife Insurance Company has six banking partners and the

Insurance product is sold through 1000 branches43. Incidentally, it may also

be noted that the first bancassurance policy in India was sold by Birla Sun.

Bancassurance has contributed approximately 20 percent of the Birla Sunlife

Insurance companys annualized premium for the year 2008 2009. The

new business premium increased from Rs.621 crore in the year 2004-2005

42
Dutta Sonali,D. 2001, SBI Life Insurance Company -Indian Perspective Insurance Chronicle, June ,
Vol. 34 (2), PP. 61-63.
43
Indian Institute of Bankers, 2002, Bancassurance in India Background Materials , Indian Banks
Association, Mumbai, Vol. 5 (1), PP.134-152.

141
to Rs.803 crore in the financial year 2008 2009. However, the

contributions by the bancassurance segment reduced from almost 40 percent

in 2004-05 to 20 percent in 2008 2009.

This is a clear indication that Birla sunlife insurance company has a

different marketing strategy, not solely depending upon their banking

partners for selling their products. The company has recruited a large

number of corporate agents and subagents to market the insurance products

directly to the customer44. The result is that the premium amount is on an

increasing trend; where as the contribution of bancassurance marginally

reduces year after year.

HDFC standard Life Insurance Company has tie-ups with HDFC

Bank, Indian Bank and Bank of Baroda and many co-operative banks. Of its

total business (Rs.589 crore), 40 percent is accounted through bancassurance

channel during the year 2008 2009, marginally increased from 37 percent

contribution in 2004-2005. The contribution of bancassurance accounts for

almost 30 percent of the total new business premium of Tata Aig Life

Insurance company for the year 2004-2005 and the share remains almost

intact even for the financial year 2008 2009. Bajaj Allianz Life Insurance

44
Krishnamoorthy,R. 2002, Bancassurance: A SWOT Analysis, Financial Express,April, Vol. XV, PP.
17-19.

142
company gains almost 28 percent of their new business premium through

bancassurance. During the four year period between 2004 2005 and 2008

2009, the contribution of bancassurance varies between 25 percent to 28

percent of the total new business premium of the company.

ICICI prudential Life Insurance Company has tied up with 18 banks -

2 commercial banks and 16 co-operative banks and the company sells the

products through 2900 branches across the country. For the financial year

ending march-2009, bancassurance contributed 25 percent of the new

business. The Contribution of the bancassurance was only 19 percent of the

total business during the year 2004-2005 and the share has increased

considerably to 25 percent during the year 2008 2009. The bancassurance

channel contributed about 21 percent of the total business for Kotak

Mahindra Life Insurance in 2008 2009. This business has come through

one private bank, 22 co-operative banks and the 400 branches pan-India.

Life insurance Corporation of India accounts for the major share of

the life insurance business in India. The Corporation still depends

considerably on individual agents and the business through the

143
bancassurance channel is very limited or even negligible (1 percent) in

relation to the overall business45.

The table exhibited below highlights the contribution of

bancassurance in the life insurance business done by the various companies

in India.

45
Reserve Bank Of India ,2000, Insurance and Banking Issuea Of Overlap, report on Trend and Progress
of Banking in India Reserve Bank Of India Publication, April, Vol. 3 No. 3, PP 68-91.

144
 Table-3.14
BANCASSURANCE BUSINESS IN INDIA

Percentage of
Sl No Name of the Insurance Company New Business Premium Business Through
Bancassurance

2004-2005 2008 2009

(RS in (RS in 2004-05 2008 09
Crores) Crores)
SBI LIFE INSURANCE
1. COMPANY 482 603 67 69

AVIVA LIFE INSURANCE

2. OMPANY 192 287 65 68

BIRLA SUNLIFE INSURANCE

3. COMPANY 621 804 40 20

HDFC STANDARD LIFE

4. INSURANCE COMPANY 486 599 37 40

TATA AIG LIFE INSURANCE

5. COMPANY 300 422 30 31

BAJAJ ALLIANZ LIFE

6. INSURANCE COMPANY 860 1036 25 28

ICICI PRUDENTIAL LIFE

7. INSURANCE COMPANY 1584 2048 19 25

KOTAK MAHENDRA MUTUAL

8. LIFE INSURANCE COMPANY - 366 - 21

LIFE INSURANCE
9. CORPORATION OF INDIA 15840 20006 1 1

Source: News Paper Reports and Various Dates

145
 It can be observed from the above table that private Life Insurance

Companies have gained the most from the bancassurance tie-ups and that

bancassurance looks set to play a significant role in the manner insurance

would be sold in India. There has been a substantial growth of

bancassurance in India. The following table provides us a sense of how

rapidly bancassurance is growing in India in terms of the number of policies

that are sold through bancassurance channel46.

46
Reserve Bank Of India, 2003, Insurance: The Indian Experience, Reserve Bank of India Occasional
Papers, June, Vol. 9 No. (2), Pp 112- 120.

146
 Table 3.15

BANCASSURANCE BUSINESS CONDUCTED BY COMPANIES

(IN PERCENTAGE OF POLICIES)

NAME OF THE INSURANCE

Sl.No 2002 2004 2006 2008
COMPANY

1 ICICI PRUDENTIAL 15% 30% 44% 53%

2 SBI LIFE 15% 50% 60% 68%

3 BIRLA SUN LIFE 25% 40% 44% 32%

4 ING VYSYA LIFE 10% 20% 45% 52%

5 AVIVA LIFE 50% 70% 76% 82%

6 ALLIANZ BAJAJ LIFE 25% 35% 50% 62%

7 ROYAL SUNDARAM ALLIANZ 40% 50% 55% 60%

8 HDFC STANDARD LIFE 10% 40% 60% 78%

9 MET LIFE 25% 30% 40% 55%

LIFE INSURANCE
10 0.7% 1% 1.1% 1.2%
CORPORATION OF INDIA
Source: Newspaper reports, various dates

147
 There is a general consensus that bancassurance is indeed bringing in

customers of higher value. The concrete numbers are not available industry

wide to prove this point. However, Birla Sun life insurance Company alone

responded to our enquiry regarding the value of policies sold through

bancassurance channel. The data provided by the company clearly state that

the average size of the policy for the agency channel is Rs.19, 500 and for

the bancassurance channel it is Rs.39, 000 per policy. This can be taken as

evidence that policies sold through bancassurance add more value.

148
 CHAPTER - IV

A SWOT ANALYSIS OF

BANCASSURANCE IN INDIA
4.1 Introduction

Once bancassurance is embraced in India with full force, a lot will be

at stake. Huge capital investment will be required to create infrastructure

particularly in Information Technology and telecommunications, a call

centre will have to be created, top professionals of both industries will have

to be hired and R&D cell will have to be created to generate new ideas and

products. It is therefore essential to have a SWOT Analysis done in the

context of bancassurance experiment in India.

Bancassurance is an important tool in the hands of bankers, insurers

and customers to maximize their benefits at a time. For banks, it is a means

of product diversification and a source of additional fee income. Banks have

the expertise on the financial needs, saving patterns and life stages of the

customers they serve. Banks also have much lower distribution costs than

insurance companies and thus are the fastest emerging distribution channel.

Insurance companies see Bancassurance as a tool for increasing their market

penetration and premium turnover. For insurers, tying up with banks

provides extensive geographical spread and countrywide customer access; it

is the logical route for insurers to take1. The customer sees Bancassurance as

1
Rao, G .V. 2003, What Brokers Are? , IRDA, Irda Journal, New Delhi. March, Vol. 5 (1), P 56.

149
a bonanza in terms of reduced price, high quality product and delivery at

doorsteps. Actually, everybody is a winner in this context.

4.2 Strengths

In India there are number reasons why bancassurance could play a

natural role in the insurance market.

In a country with more than one Billion people, sky is the limit for

personal lines insurance products. There is a vast untapped potential waiting

to be mined particularly for life insurance products. There are more than

1000 Million lives waiting to be given a life cover. There are about 200

Million households waiting to be approached for a householders insurance

policy. Millions of people travelling in and out of India can be tapped for

Overseas Mediclaim and Travel Insurance policies. After discounting the

population below poverty line, the middle market segment is the second

largest in the world after China to tap.

4.2.1 Wide Network of Branches

Penetration of commercial banks in India has been quit extensive. In

India, the bank branch net work encompasses nearly 75,000 branches

inclusive of public sector and private sector banks. Close to 1 lakh branches

of co-operative, district co-operative and regional rural banks also exist.

Each branch serves an average of 12,000 people. Banks have not only been

150
successful in the urban areas; it has also grown tremendously in rural areas.

The only other national institution with a bigger reach is the postal service.

The deliberate expansion policy of banks in rural areas has contributed to

poverty reduction in India. Instead of simple headcounts, if we take other

bank penetration measures like total value of deposits as a percent of GDP, it

is also exhibiting an upward trend. The bank deposits are growing at a rate

much faster than the gross domestic product. The level of growth in bank

deposits has been enormous since independence and stalled at above 45

percent GDP in 20102. Banks have become the main saving vehicle in the

economy. Thus, banks can prove to be an ideal vehicle for selling insurances

products due to their existing wide net work of branches all over the country

including the rural areas.

4.2.2 Low Non-performing Assets of Banks

There are two serious problems that banks suffer from. First, banks

have been saddled with bad loans in the early 1990s. Second, banks are

overstaffed. Even though it sounds paradoxical, both of these developments

are relevant for bancassurance3.

2
Raje, P. (2000) Where Did India Miss a Turn in Banking Reform? Is there a Comeback? Center for the
Advanced Study of India, CASI Working Paper, December 2000.
3
Ranade, A and R. Ahuja, 1999, Life Insurance in India: Emerging Issues", Economic and political
Weekly, January 16-22/ 23-29, Vol XXXIV, PP. 124-132.

151
 In India, during the period 1991-92 many a number of banks were

undercapitalized. The government started the long and slow process of

infusing more money to these public sector banks. The total amount of

money exceeded eight percent of the GDP. Ever since the recommendations

of the Narasimham committee report accepted by the government, the

problem of under capitalization of Indian banks never came under scrutiny.

The union Budget 2000-01 announced that the Government would consider

recapitalization of the weak banks to achieve the prescribed capital adequacy

norms.

The subsequent economic boom and the stringent RBI norms have

helped the commercial banks to bring down the proportion of

Nonperforming assets. The proportions of the Nonperforming assets

continue to comedown for banks in India. Thus, the commercial banks will

feel more comfortable to get into the insurance business more directly.

Probably, the RBI is going to take an accommodative position if it sees a

continuously falling proportion of nonperforming debt. On this count, there

is a greater likely hood of many banks entering the fry.

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4.2.3 Over-Staffing

Second, the problem of overstaffing in banks may become a strength

for the bancassurance business. There have been numerous committees set

up in India and by international organizations like the World Bank and the

IMF pointing out the problem of overstaffing in the banks in India,

especially the government owned banks. The general consensus among the

experts is that the public sector banks needed to shed at least 10 percent of

their workforce. Unfortunately, this was not possible because the banks have

one of the most militant and politically powerful unions in the country. To

manage this problem, the banks have taken some alternative steps. They

have reduced the cost of operations from around 3 percent of total deposits

in the early 1990s to around 2.5 percent by 2000. The cost of operation is not

uniform across all types of banks. The reduction of cost of operation has not

been uniform either. Therefore, the commercial banks have taken additional

steps. One of the much vaunted efforts in banks in India, in recent years, has

been the so called voluntary retirement schemes (VRS). Typically,

employees over the age of 40, who have served the banks for ten years or

more, become eligible to take voluntary retirement. Since, the voluntary

retirement scheme does not involve coercion; it has the blessings of the

relevant union. The much talked about voluntary retirement scheme almost

153
backfired. The problem has been that whenever the offers were made, the

most productive and most employable workers took up the offer. This

problem has been termed as a dead wood problem in voluntary retirement

scheme of banks. Only the workers who could not be employed elsewhere

are more likely to stay with the banks4. This has the problem of lowering

productivity of the banks. The banks, have responded to this problem by

refusing to grant voluntary retirement schemes to persons it deems

necessary.

Voluntary retirement scheme has been an expensive exercise for

banks. It has been estimated that they have spent about sixty million rupees

during 2000-2003. More than 1,00,000 employees, constituting about 11

percent of total number of employees in the banking sector exercised the

option of voluntary retirement scheme. From the point of view of the

headcount, the exercise has produced the desired reduction in the number of

work force. Through this process even the initial target of 10 percent was

exceeded. The major objective of voluntary retirement scheme was to ease

out non-officer category employees form the commercial banks. But in

the process, the major takers of voluntary retirement scheme turned out to be

efficient and otherwise employable officers. The commercial banks,

4
Krueger, O. 2004, Banking Needs of Global Economy, Keynote Address, IBA Bulletin Special Issue
2005, January, Vol XXVII, PP. 23-35.

154
especially the State Bank of India, have been exposing another alternatives

to relocate the human resources without resorting to the voluntary retirement

scheme or any other scheme that have adverse effects on the productivity of

the banks5. The commercial banks can redeploy some of their existing staff

for selling insurance products. Thus, the excess staffing problem may turn

out to be a boom for bancassurance business, though this development is

going to be a one-time only effect on bancassurance6. The over staffing

problem and the reduction in the Nonperforming assets motivate the Indian

commercial banks to enter into bancassurance business.

4.2.4Bank Culture

The Indian banking sector does not have the same stigma that life and

other insurance carries. The banks are culturally more acceptable to the

society than the insurance companies. Once the commercial banks start

marketing the insurance products both the life and non-life, the customers

are more likely to acquire them. This unique status of the commercial banks

will definitely trigger as a boost for marketing the insurance products. This

factor may diminish in importance over a period of time as people become

more educated.
5
Dasgupta, S. 2001, Iffco-Tokio yet to appoint actuaries", Economic Times, January 23, Vol XI (4) P 12.

6
Yiannis, V. 1999, Bancassurance: Present and Future, Insurance and Reinsurance Conference October,
Vol. XXX, P 67.

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4.2.5 Fee Based Income

Banks can earn fee based income for insurance sales. The fee based

income for the banks varies based on whether they operate as a corporate

agent these banks will earn higher commission than for referral agents

where selling is executed by the insurance companies themselves. At

present, however, banks are prohibited from offering commission and other

incentives for selling insurance products. But, the banks have found ways to

circumvent the problem by offering car allowances and other allowances for

those employees selling the product. The fee based income that the

commercial banks earn through bancassurance will supplement their core

lending activities and boost their profitability. This phenomenon is a strong

motive for the banks to enter into the bancassurance business7. The other

major strength lies in a huge pool of skilled professionals available with

banks or insurance companies who may be easily relocated for any

bancassurance venture.

4.2.6 CustomerLoyalty

Banks seek to retain customer loyalty by offering them an expanded

and more sophisticated range of products than simple bank deposits of few
7
Roy, S. 2001, "Insurance Sector: India." Industry Sector Analysis, National Trade and Development
Board, US Department of State, Washington, DC, December, Vol IX, PP. 17-19.

156
varieties. The Life Insurance Companies and other General Insurance

Companies are offering a variety of innovative products. The banks can

offer these innovative products over and above the conventional activities to

retain the customer base. This is a key driver for raising the motivation of

bankers8.

4.2.7 Low Acquisition Cost

Acquisition cost of insurance customers through banks is low. Selling

insurance to existing mass market banking customers is for less expensive

than selling to a group of unknown customers. Experience all over the world

has shown that the bancassurance firms have a lower expense ratio. This

benefit could go to the insured in the form of lower premiums. The ratio of

expenses to premiums is an important efficiency factor. It is noticed that

expenses ratio in insurance activities through bancassurance is extremely

low. This is because the banks and the insurance companies are benefiting

from the same distribution channels and people. Insurers who operate

through bancassurance own and control relationships with customers.

Insurers found that direct relationships with customers gave them greater

control of their business at low cost. Insurers who operate through the

8
Manoj Kumar ,R. 2000, Bancassurance: A SWOT Analysis, Journal of Banking Finance, July, Vol
XXI, PP 46-47.

157
agency relationship are hardly having any control on their relationship with

their clients.

4.2 .8 More Deposit

Life insurance is basically a savings market and it is roughly

estimated that the Life Insurance premium is more than half of the total

premium collected by the whole insurance sector both the life and non-life

insurers. Therefore, the banks can take this opportunity and through

bancassurance they can increase their deposits.

4.2.9 Marketing and Processing Capabilities

Other major strength of the banks is their marketing and

processing capabilities. Banks have extensive experience in marketing to

both existing customers and non-customers. They also have access to

multiple communication channels, such as statement inserts, direct mail,

ATMs, telemarketing, etc. Banks proficiency in using technology has

resulted in improvements in transaction processing and customer service9.

This is will be another key factor for the success of bancassurance in India.

9
Vaidyanathan, R. 2001, convergence in the financial services: Role of insurance industry in emerging
markets. Paper presented at the 5th Apria conference on risk and insurance at Bangalore.

158
 4.2.10 Pension Reforms

The ongoing pension reforms and the deregulation of pension funds

pave the way for the banks to play an important role in that sector. Banks

can provide collection and payments of pension contributions10. Banks can

also play a major role in developing a viable health care program in India in

collaboration with the health insurance companies.

4.3 Weakness

The bancassurance in India as a business proposition has its own

weaknesses. These weaknesses may become real hurdles for the progress of

the bancassurance business in India.

4.3.1 Lack of Networking

The Information Technology culture is unfortunately missing almost

in all of the future collaborators i.e. banks, General Insurance Companies

(GIC) & Life Insurance Companies (LIC). A late awakening seems to have

dawned upon them but it is a case of too late and too little. In the age of

Wide Area Network Internet (WAN) and Vast Area Network (VAN), simple

LAN has not yet been introduced even in many of the offices these

institutions. Internet connections are not available even to many of the

10
Joshi, P. N. 1998, Narshimmam Committee Report II and its implications, proceedings of the Bank
economists Conference, Vol. XVVI, P 23.

159
managers and operating offices. In spite of growing emphasis on total

branch mechanization (TBM) and full computerization of bank branches, the

rural and semi-urban banks have still to see information technology as an

enabler. Complete integration of branch network involves huge investments

for creating Information Technology and Communication infrastructure.

This is, perhaps, the major hurdle for the success of bancassurance as a

business model11.

4.3.2 Low Savings Rate

Though we have a huge market for insurance policies, the middle

class who constitutes the bulk of this market is today burdened under

inflationary pressures. The secret lies in inculcating the savings habit.

However, considering the amount of surplus funds available with the

middle class for investing in future security, the ability to save is very

nominal12.

4.3.3 Inflexibility of Insurance Products

Another drawback is the inflexibility of the products, i.e. it cannot be

tailor made to the requirements of the customer. For a bancassurance venture

11
Rajiv, K. 2003, Bancasurance in india A Special Reference, ICFAI Press, Vol. XXVI No.12, PP. 45-
48.
12
Lskshmi, R. 2005, Indian Insurance sector merger to financial sector, IIM, Vol.12, PP. 21-27.

160
to succeed, it is extremely essential to have an in-built flexibility so as to

make the product attractive to the customer.

4.3.4 Absence of Tax Exemptions

The tax structure in the country may dampen the progress of

bancassurance in India. Fortunately, the Life Insurance Corporation (LIC)

schemes get Tax exemptions on maturity, also the payment on such policy

are tax exempted. There is also a small tax relief for premiums paid in

certain kind of polices. But personal line products like householder; travel

policies, etc., do not enjoy the tax benefits. The absence of tax exemptions

for such personal line insurance products is a real weakness in the

bancassurance business in India13.

4.4 Opportunities

4.4.1 Enormous Data base

The data base of the commercial banks is enormous. This data base

has to be dissected variously and various homogeneous groups are to be

churned out in order to position the bancassurance products. By successfully

mining their customer databases, leveraging their reputation and distribution

13
Rajesh, R. 2003, Bancassurance- For life, ICFAI press, Vol. XXVII, PP. 45-56.

161
system and utilizing the marketing techniques and the products tailored to

the middle markets, the Indian banks have the opportunity to almost double

the conversion rates of insurance leads into sales and have increased sales

productivity to a ratio which may be more than enough to make the

bancassurance a highly profitable proposition.

Insurers have much to gain from marketing through banks. Personal

lines carriers have found it difficult to grow using traditional agency systems

because price competition has driven down margins and increased the

compensation demands of successful agents. Over the last decade, life

agents have sold fewer and larger policies to a more upscale client base.

Middle income consumers; who comprise the bulk of bank customers get

little attention from most life agents. By capitalizing on bank relationships,

insurers will recapture much of this under served market14.

The Life Insurance Corporation and General Insurance Corporation

have formidable agent network. This formidable agent network will pose

strong competition to the new private sector insurance companies to

establish their own networks. The wide distribution network of banks

14
Nitish, A. 2001, Bancassurance Issues and Challenges, IIBM, Vol. 5, (3), PP. 58-61.

162
provides a great opportunity for those private sector insurance companies to

sell the insurance products with proper tie-ups with the commercial banks.

Most insurers that have tried to penetrate middleincome through alternative

channels such as direct mail have not done well. Clearly, a change in

approach is necessary. As with any initiative, success requires a clear

understanding of what must be done, how it will be done and by whom. The

place to begin is to segment the strengths that the banks and insurers bring to

the business opportunity.

4.4.2 Untapped Potential

Bancassurance currently accounts for almost one fourth of the total

new premium collected. Going by the number of the branches selling

insurance products, it appears that it is yet to attain critical mass. Out of the

total 1.75 lakh branches of commercial and co-operative banks, hardly one

fourth is engaged in selling insurance products. If more and more branches

start selling insurance products, particularly the co-operative banks, the

penetration of insurance may increase sizably, especially in the rural areas15.

The first and foremost objective indicators of insurance potential in a

country are (a) insurance penetration, i.e., premium as percentage of GDP

15
Dr. Rajendra Singh, S. 2006, Bancassurance-A SWOT Analysis IIBM, Vol. 16,
(7), PP. 34.

163
and (b) insurance density, i.e., premium per capita. The penetration of life

insurance as a whole is abysmally low. India, with an insurance penetration

of 2.3 percent and insurance density of $8 belongs to one of the lower rungs.

These indicate that a lot of potential does exist in both life and non-life areas

for the insurance industry as a whole and bancassurers in particular.

The financial environment has become equally uncertain due to

liberalization measures and financial scams. Interest rate deregulation,

combined with pursuance of bringing in a soft interest rate regime, has

resulted in rates of interest on all financial instruments coming down

substantially. In India, where no good old age pension scheme, public

healthcare system or unemployment welfare scheme exists, the public,

particularly the middle class, which no doubt wants return but safety and

liquidity first and foremost, finds it difficult to save money. The stock

markets have become highly unreliable and are tainted with scams, and

mutual funds have moved in tandem with stock markets. Money market

instruments are still undeveloped. Many urban banks in various parts of the

country have failed or become fragile. Against this backdrop, life insurance

products, at least, give tax benefits and future security. In fact, taking tax

benefits into account, the return on certain life products are more than on

bank savings products, as interest earned on the latter, beyond a certain

164
stipulated sum, is taxed at source, like dividends earned on shares. Thus, the

moral of the story is that life insurance products still have a bright future

even though there are several competing products from banks and other

financial intermediaries. Further, the gap between bank savings products and

certain life products is fast narrowing16.

Today, life in general, has become more uncertain and risky. Not only

are man-made dangers (burglary, accidents, terrorist activities, hijacking,

etc.) on the rise but natural catastrophes (earthquake, flood, cyclone, etc.) are

also becoming more frequent. One certainly does not welcome such

uncertain times, but these uncertain times create opportunities for insurance

business. The joint family system, which functioned like an insurance

system, is gradually collapsing due to several reasons. More and more

nuclear families are coming up, and with this, the demand for life-cover for

the head of the family and family members is also rising. An outcome of the

above-mentioned phenomenon is that the elderly members in families are

being gradually required to manage themselves either out of their own

volition of not becoming dependent on their children or being compelled in

one way or the other by their children. Thus, the future older generation has

to plan for their financial safety and security in their old age, and the

16
Raju, S. K. 2006, Impact of Bancassurance in India, Insurance Professional, PP.42 46.

165
awareness is also increasing in this regard. This speaks well for life

insurance products17.

In urban and metro areas, where the customers are willing to get

many services like lockers and safe deposit systems and other products and

services from banks, there is a good opportunity to market many property

related general insurance policies like fire insurance, burglary insurance and

medi-claim insurance etc. Banks in their normal course of functions lend

finance in the form of loans for cars, or for buying a house to clients etc.

They can take advantage of this by cross-selling the insurance products and

combine it as a package18.

Another area that could be of interest to bankers to sell insurance is

exploiting the corporate customers and tying up for insurance of the

employees of corporate clients, which would be an avenue with easy access.

In most cases banks provide salary disbursement and loan facilities but here

they can provide insurance cover as well.

The opportunity to augment fee based income is another alluring

factor which has given impetus to the concept of bancassurance in India,

17
Dr. Hassan, A. 2004, Impact of marketing insurance products through banks: Indian perspective, IBA
Bulletin, Special Issue 2004, June, Vol XXVII No 4, PP. 45-47.
18
Amitesh, C. 2002, Bancassurance The most challenging insurance distribution channel, Journal of
Risk and Insurance, Vol. 68, PP. 489-506.

166
especially in a regime of falling interest rates and low levels of credit off-

take. Banks need to make a careful assessment of all costs involved,

including hidden and creeping costs to arrive at the net benefit. Initial

infrastructure set-up costs, training and orientation costs, communication

and lead conversion costs, employee productivity and breakeven level of

business and such other issues need to be gone into thoroughly. In short, an

in-depth analysis of the value chain should be done in order to draw valid

inferences and assure oneself of the real income through fee\commission in

selling insurance products19.

While the above points are from the macro level view, there are

some micro aspects that need to be focused upon. Micro insurance which is

at a miniscule level to the over all businesses, may also undergo dramatic

change. Insurance companies may have to prepare for more investments in

technology to allow processing and issue of policies at the respective towns,

to make the process cost-effective.

Many banks have seized the opportunity to partner with insurers

seeing the apparent benefits, but to translate them into reality; the challenge

is in creating an environment of top-level involvement of bank

managements. There is a lot of fanfare and media coverage while entering

19
Krishnamoorthy, R. 2004, Bringing Bancassurance to India , IRDA Journal, Vol.6 (3), PP. 73-75.

167
into partnerships, but the same enthusiasm and direction from the top to

sustain the tempo may be lacking.

There is also scope for banks to explore other models of

bancassurance. The major part of business in bancassurance still happens

only at the branch. The other streams such as out of branch models and

private banking and wealth management is yet to pick up to a large

extent20.

Resolving possible conflicts of interest, establishing credible service

level agreements between the bank and the insurer, parking of funds and

their management, and other similar kinds need to be straightened to ensure

mutually enriching relationship.

During the last couple of years, banks have been flush with deposits,

whereas credit deployment has been slow - both due to several socio-

economic reasons. Banks are investing in government and approved

securities, overshooting the Statutory Liquidity Ratio (SLR) ceiling.

Therefore, banks now get an opportunity to focus on selling insurance

products instead. Some areas with good potential for bancassurers are health

insurance, credit insurance, deposit insurance, travel insurance, capital

20
Naveen, S. 2002, Bancassurancce A SWOT Analysis, IBEXI Press Release, Vol. 5, PP 4-9.

168
market-related insurance and pension. It is one of the basic ways to increase

return on assets (ROA) because they can increase their fee income through

sale of insurance products. Banks that effectively cross-sell financial

products can leverage their distribution and processing capabilities for

profitable operating expense ratio.

4.5 Threats

4.5.1 Conflict in Culture

Success of a Bancassurance venture requires change in approach,

thinking and work culture on the part of everybody involved. The work force

at every level are so well entrenched in their classical way of working that

there is a definite threat of resistance to any change that Bancassurance may

set in. Any relocation to a new company or subsidiary or change from one

work to a different kind of work will not be easily acceptable by the

employees. The difference in working style and culture of the banks and

insurance sector needs greater appreciation21. Insurance is a business of

solicitation unlike a typical banking service, it requires great drive to sell/

market the insurance products. It should, however, be recognized that

bancassurance is not simply about selling insurance but about changing the

mindset of a bank. Moreover, in India, since the majority of the banking

21
Dr. Hareendranath, S. 2005, Bancassurance in India Opportunities and challenges, Journal of
Financial Economics, Vol.11, PP. 12-13.

169
sector is in public sector and which has been widely disparaged for the

lethargic attitude and poor quality of customer service, it needs to refurbish

the blemished image. Else, the bancassurance would be difficult to succeed

in these banks. The basic attitudinal incompatibility on the part of employees

of banks and insurance companies and the perception of customers about the

poor quality of banking services had led to failures of bancassurance even in

some of the Latin American countries.

Another possible threat may come from non-response from the

targeted customers. If many joint ventures took place between banks and

insurance companies then it may happen that the customers may not respond

to such ventures as happened in U.S. Insurance in India is perceived more as

a saving option than providing risk cover. So this may create an adverse

feeling in the minds of the bankers that such products may lessen the sales of

regular bank saving products. Also selling of investment and good return

products may affect the Fixed Deposit Portfolio of the banks.

4.5.2 Conflict of Interest

There are also glitches in the system of bancassurance strategy in the

form of conflict of interests, as some of the products offered by the banks,

viz., term deposits and other products which are mainly aimed at long term

savings/ investments can be very similar to that of the insurance products.

170
Banks could as well feel apprehension about the possibility of substitution

effect between its own products and insurance products and more so, as a

number of insurance products in India come with an added attraction of tax

incentives22.

The problem of conflict of interest would also arise in a

different form; as banks are privy to a lot of information about the

customer, especially in the context of know your customer (KYC)

system being in place, these information could be used by the

insurers for their unfair advantage. With more integration between

and among various constituents of financial sector, there is greater

possibility for contagion effect.

In case the Bancassurance is fully integrated with that of the banking

institution, it is suitable only for larger banks. However, it has other allied

issues such as putting in place proper risk management techniques relating

to the insurance business, etc. As there is a great deal of difference in the

approaches of selling of insurance products and the usual banking services

a thorough understanding of the insurance products by the bank staff

coupled with extra devotion of time on each customer explaining in detail of

22
Jayshree, B. 2006, Bancassurance New avenues for banks, Financial Express Front Page, Vol.xxx, P
25.

171
each products intricacies is a prerequisite. Moreover, insurance products

have become increasingly complex over a period of time, due to

improvisation over the existing products as well as due to constant

innovation of new products, emanating from the excessive competition

adding to even more difficulties in comprehension of the products and

marketing by the bank staff. These can result in resistance to change and

leading to problems relating to industrial relations23.

Bankers in India are extremely nave in insurance products as there

were no occasions in the past for the bankers to deal in insurance products;

therefore they require strong motivation of both monetary and non monetary

incentives. This would be more so in the emerging scenario due to complex

innovations in the field of insurance / pension products at a rapid pace with

the entry of a number of foreign insurance companies with vast experience

in the developed countries framework.

The most common obstacles to the success of Bancassurance are poor

manpower management, lack of a sales culture within the bank, no

involvement by the branch manager, insufficient product promotions, failure

to integrate marketing plans, marginal database expertise, poor sales channel

23
Pushpa Veni, V. 2006, Bancassurance An emerging Trends In India, The insurance Journal,
January- June, Volxx, PP. 36-41.

172
linkages, inadequate incentives, resistance to change, negative attitudes

toward insurance and unwieldy marketing strategy. Bank employees are

traditionally low on motivation. Lack of sales culture itself is bigger

roadblock than the lack of sales skills in the employees. Banks are generally

used to only product packaged selling and hence selling insurance products

do not seem to fit naturally in their system24.

Human Resource Management in bancassurance business may

experience some difficulty due to such alliances in financial industry.

Poaching for employees, increased work-load, additional training,

maintaining the motivation level are some issues that has cropped up quite

occasionally. So, before entering into a bancassurance alliance, just like any

merger, cultural due diligence should be done and human resource issues

should be adequately prioritized.

The private sector insurance firms are finding it very difficult to cope

with the frequent change management in the public sector banks. State-

owned banks get a new chairman, often from another bank, almost every

two years, resulting in the distribution strategy undergoing a complete

change. This will disturb the on-going bancassurance business of the banks.

24
MUKUL, K. 2003, Bancassurance: Taking the lead, ICFAI Press, September, Vol. XXVIII, PP.124-
127.

173
 The banks also have fear that at some point of time the insurance

partner may end up cross-selling banking products to their policyholders. If

the insurer is selling the products by agents as well as banks, there is a

possibility of conflict if both the banks and the agent target the same

customers25.Further, since life products and banking products are similar,

efforts to market the former will be less cumbersome for the bancassurance

company. However, non-life products are entirely different from life or

banking products and are far too complex, with high counter-party and

reinsurance risks, and hence, it would be difficult for bancassurance

companies to enter into general insurance business immediately, until and

unless they develop and retain the required skill.

LIC and the four subsidiaries of GIC are well established in their

respective lines of businesses. Opening up the insurance sector has also

awakened them, and being old players, they would like to take their

competitors, who are new, by the horns. Thus, they will strive to become

more competitive, and will be buttressed by their financial and non-financial

strength, including the lobbying power. This would pose a threat to the new

bancassurers. Too much of competition may lead to accentuation of the

25
Manojit, S. 2005, Multiple Bancassurance tie-ups may get nod, The Financial Express, Vol No. 9, PP.
23-24.

174
adverse selection and moral hazard problems, which may ultimately prove

detrimental to the insurance industry as a whole26.

The kind of channel conflict is a problem the new bancassurers in

India have to learn to avoid. One of the methods of limiting this is to insist

on banks creating specialized subsidiaries for handling insurance.

Fortunately, this seems to be the preferred model. Large organizations

cannot be managed as easily as smaller ones. Complexity generates its own

problems. Overburdening of top-level bureaucracy results in the neglect of

core competence. Banks have to take good care to avoid these pitfalls when

they undertake insurance as a new activity.

It cannot, however, be denied that banks' access to information about

depositors does provide a huge and useful database for selling insurance. But

this is only one aspect of insurance business. The way a bancassurer handles

the funds received and invests them properly to achieve a good return is

equally important. Risk management becomes particularly significant for the

bancassurer27.

26
Manoj Kumar,R. 2002, Marketing and Distribution Channels in Bancassurance Insurance professional,
Vol. 5(1), PP 17-19.
27
Rao, C.S. 2001, EMERGENCE OF BANCASSURANCE IN INDIA, The Hindu Express, Vol. 7(3),
PP. 41-43.

175
 While there are great hopes that the new brand of bancassurers and

non-banks handling insurance will offer a better service than the earlier

monopolists, these hopes particularly revolve around the structure of

incentives, which is a significant part of the remuneration package of

insurance personnel. Banks which undertake insurance have to devise

policies to offer attractive incentive packages to those working in insurance

subsidiaries, without affecting their banking staff.

India's new policy on insurance has been one of the most hotly

debated elements of economic reforms. Critics have been particularly quick

to focus on the possibilities of abuse and fraud, recalling those incidents

which led the Government to nationalise private life insurance. It is,

therefore, of the utmost importance that the new experiment, initiated as a

result of the latest round of reforms, succeeds in giving both better service

and larger spread of insurance benefits without leaving any loopholes for

abuse of financial powers inherent in owning and managing an insurance

company. Fortunately, the IRDA is there to assure us of proper regulation

and supervision28.

28
Ajay, K. Y. 2003, A Report on Impact of Bancassurance on Indian Insurance Market, Insurance
journal, Vol.XX, PP 34-37.

176
 Banks have not covered themselves with glory when they have

entered the securities business, such as mutual funds. It is ultimately the test

of the quality of management which banks bring to bear upon the new

business they are undertaking. No amount of supervision can make up for

the flaws of management. The design of the structure of the new

bancassurance model should draw on the experience of similar attempts in

such countries as France and Germany.

There was also the related issue of oversight and regulation. The UK

started a new trend in 1997 by setting up a single regulator, the Financial

Services Authority, in charge of banking, securities and insurance. This issue

is of some importance to India also. Recent events would, however, show

the wisdom of having separate agencies to supervise banking and securities

businesses. Even with separate agencies, there have been failures29.

In these circumstances, supervision and regulation of insurance is

better handled through the Insurance Regulatory and Development

Authority. But sharing of information between different regulators is

definitely both worthwhile and necessary. There is, therefore, need for a

high level Steering Group, consisting of the RBI Governor, SEBI Chairman

29
Pradhan, S. 2003, BANCASSURANCE IN INDIA : A SWOT ANALYSIS, Journal of Insurance,
Vol. 10, PP. 11-13.

177
and IRDA Chairman for the successful functioning of bancassurance. The

RBI suggested recently that it might well be possible to give legal sanctity to

such an umbrella organization. Such a body will include not only the

representatives of the former regulators, but also the Finance Secretary.

Banking is central to the integrity of financial services. All other elements of

the financial sector ultimately revolve around the effective functioning of the

Payment and Settlement System run by the banks. It should, therefore, be the

path of wisdom not to dislodge the central bank from its supervisory and

regulatory control over the banks.

Although IRDA has done appreciable work within the short period,

the regulation itself is a learning experience, any major migration of risk

from insurance to banking would be more devastating if that was not

handled appropriately at the right time30.

In the absence of a unified regulator or a single regulator, the

possibility for regulatory arbitrage could not be ruled out. Presently there is

no statutory compulsion that the regulators should part with each other the

sensitive information relating to their respective regulatory areas in order to

read the signal, if any, which has systemic implications.

30
Narayanan, K. 2004, Bancassurance- Cheaper Cover, Out Look Money, Vol.24(4), PP. 23-24.

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 In India all insurance companies in private sector are of recent origin

and are in the process of stabilising, also highly aggressive due to tough

competition. The over ambitiousness should not smack their own limitation,

especially in the case where insurance business is an internal organ of the

universal banking system. Especially in a situation such as large scale

natural calamities, viz., Tsunami, earthquake, floods, etc., would have a

serious debilitating impact on the banking system, via insurance business.

Therefore, the regulation and supervision needs to address the institution as

a financial conglomerate rather than each institution individually31.

Differences in the risk characteristics in banking and insurance

will persist, relating in particular to the time pattern and degree of

uncertainty in the cash flows and that has to be recognized and appropriately

handled. The insurers internal risk management and control systems for

managing their asset market activities, and credit risk seems to be relatively

less transparent unlike the banking system as also the prudential regulatory

and supervisory system towards insurance is relatively recent one and less

31
Ramesh, M. 2002, Aviva Life bet on bancassurance pays off, The Hindu Business, Vol 21(4), PP 12-
14.

179
rigor as compared with the banking system, especially in the context of the

banking system moving towards the Basel II framework32.

Conflicts of interest between different regulators also could not be

ruled out. Ensuring transparency and disclosure on activity-wise may be a

difficult task for the regulators, albeit it is essential. Possibility of abuse of

consumers by bankers from being coerced to buy insurance products against

their will need to be guarded, which RBI has been already emphasizing in its

circular33. Possibility of banks using the long term insurance funds to meet

their short term liquidity and the problem of asset liability management

also could not be ruled out.

From the above discussions relating to the SWOT analysis of

bancassurance in India, the following four hypotheses are developed and

tested.

Hypothesis 1: For banks, if the business per employee is low, it is likely to

be attracted to improve productivity by adding bancassurance in their

portfolios.

32
Rajesh, S. 2004, Bancassurance In India Insurance Professional, Vol. 9, PP. 3-24.
33
Rathur, S. 2005, Bancassurance A Emerging Trends In India, Insuurance Profeesional , Vol 12, PP.
13-17.

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Hypothesis 2: For insurance companies, non-performing assets of a bank

will act as a brake on the bank/insurance company tie-up for insurance

distribution.

Hypothesis 3: If a bank is profitable (by the standard of banking industry), it

could be less likely to get away from core business. On the other hand, a

more profitable bank might be willing to gamble some of its profits to a new

line of business.

Hypothesis 4: For insurance companies, the larger the network of bank

branches (for banks with national presence), the more the likelihood of a

bank/insurance company tie-up for insurance distribution.

To measure various factors discussed in the hypotheses listed above

some instruments are needed. For the first hypothesis the variable business

per employee is considered as the measure for business activities of the

banks.

For the second hypothesis, the independent variable net non-

performing assets/net advances is taken as a variable to measure the non-

performing assets of the bank.

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 For the third hypothesis, the return on assets (ROA) of

commercial banks is the independent variable.

For the fourth hypothesis, the volume of business done by the banks is

considered as the size variable. All of these variables have been collected

from the banking report of the Reserve Bank of India 2008-09 for each of

the 95 banks operating at the time (some of them have since merged with

others).

Results of binary regression for the determinants of bancassurance in

the following table.

TABLE No: 4.1

Dependent Variable: Bancassurance (binary)

Independent Variable Coefficient z-Statistic Probability

Business per employee -0.001451 -2.367214 0.0179

NPA/Advances -0.044439 -1.866148 0.0620

Return on Assets -0.060288 -0.632505 0.5271

Log (size) 0.081921 1.932505 0.0521

Constant 0.848935 2.037997 0.0416

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 The method used is Maximum Likelihood - Binary Logit. (The results

are very similar for Probit and extreme value methods). Convergence

achieved after 4 iterations. Covariance matrix is computed by using second

derivatives. Total number of observations is 95. The number of observations

where bancassurance = 1 is 42 and the number of observations where

bancassurance = 0 is 53.

For the results which are reported in the above Table it is noted that

the variable"business per employee" is negatively correlated with

bancassurance variable at a significance level of 5 per cent. This confirms

our first Hypothesis that for banks, if the business per employee is low. it is

likely to be attracted to improve productivity by adding bancassurance in

their portfolios.

The asset performance is also negatively correlated with the non-

performing assets. However, the association is weaker (only significant at

10per cent). Thus, we find qualified support for the second Hypothesis.

The third hypothesis did not have any support from the results.

The fourth hypothesis is also marginally supported (at 10per cent

level).

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 CHAPTER - VI

SUMMARY OF FINDINGS,

SUGGESTIONS AND CONCLUSION

6.1 INTRODUCTION

The banking and insurance industry have changed rapidly in the

changing and challenging economic development throughout the world. In

the competitive and liberalized environment everyone is trying to do better

than others and consequently survival of the fittest has come into effect.

Insurance companies are also to be competitive by cutting cost and serving

in a better way to the customers. Now the time has come to choose and

adopt appropriate distribution channel through which the insurance

companies can get the maximum benefit and serve the customers in

manifold ways. The intermediaries in the insurance business and the

distribution channels used by carriers will perhaps be the strongest drivers of

growth in this sector. The time has come for the industry to gradually move

from traditional individual agents towards new distribution channels with a

paradigm shift in creating awareness and not just selling products.

Indian insurance sector has undergone a sea change in the last ten

years, ever since the sector was opened up for private players. Instead of

falling back on the individual agents for business, new insurance companies

have started to experiment with other channels such as bancassurance and

industry brokers.

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In today's scenario, insurance companies must move from selling insurance

to marketing an essential financial product. The distributors have

become trusted financial advisors for the clients and trusted business

associates for the insurance companies, so this calls for leveraging multiple

distribution channels in a cost effective and customer friendly manner.

Bancassurance is one such distribution channel that offers huge source

of untapped opportunities. Bancassurance simply means selling of insurance

products by banks. In this arrangement, insurance companies and banks

undergo a tie-up, thereby allowing banks to sell the insurance products to its

customers. This is a system in which a bank has a corporate agency with one

insurance company to sell its products. It has its origin decades ago in

France, where this channel of distribution today is still the predominant

source of insurance business. It has grown at different places and taken

shapes and forms in different countries depending upon demography,

economic and legislative prescription in that country.

Bancassurance is a new buzzword. It originated in India in the year

2000. Given Indias size as a continent, it has a very low insurance

penetration and a lower insurance density. India has a well-entrenched wide

branch network of banking system, which only very few countries in the

248
world could match with. The bancassurance has not yet fully blossomed as

far as India is concerned, nevertheless they have started yielding the results.

It is predicted by the experts in the field that almost 90 percent of the share

of insurance premium will come from bancassurance business in future.

With enormous benefits for banks like increase in revenue, return on assets,

customer retention, better reputation etc., the bancassurance is going to be a

big revolution in the banking industry. The business of banking has become

much more diversified. The customer preferences have shifted from deposits

to investments. Thus, it has become imperative for the banks to retain the

customers by providing more value added services under one roof as well as

to find alternative ways to generate income. Since, the bancassurance

provides the best possible solution to this, most of the banks now a days

have started selling insurance products to its customers. Hence, there is a

need for a study to know whether the banks have been benefited out of

bancassurance by way of financial analysis. To understand the financial

impact of bancassurance in the banks in India and the perception of the

customers regarding the bancassurance, a study on bancassurance in India is

undertaken.

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 Bancassurance a term coined by combining the two words Bank and

insurance connotes distribution of insurance products through banking

channels. Bancassurance has been defined as the Provision of distributing

insurance and banking products and services through a common distribution

channel to the same client base. Bancassurance is an important tool in the

hands of bankers, insurers and customers to maximize their benefits at a

time. In a situation of constant asset base, the bank can increase Return on

Assets (ROA) by increasing their income, by selling insurance products

through their own channel. The advantage of a bank over the traditional

distributors of insurance is the lower cost of sales per head, which is made

possible by their sizeable loyal customer base.

The study mainly focuses on the financial performance of the

bancassurance business and its contribution to the overall progress of the

banks in India. The present study analyses the awareness of the customers

about the bancassurance and their perceptions on insurance as well as

bancassurance. The study also measures the initiatives taken by the banks in

endorsing the insurance products of their partners. The study throws light on

the (SWOT) analysis of bancassurance in India. Any research on

bancassurance must cover predominantly three parties such as bankers,

insurers, and customers. This study mainly covers the perception of their

250
customers in relation to their bankers with regard to the bancassurance

business. The important findings recorded in this preceding chapters of the

present research report with suitable suggestions, incorporated in this

chapter is as follows;

Bancassurance offers advantages to bankers by creating a universal

banking platform by offering a wider financial services package and

positioning the Bank as a one-stop-shop for all financial and protection

needs of customers. The selling of insurance products provides bank

employees with new challenges and enhanced skills, thus improving their

productivity and efficiency. The insurer can increase their volume of

business through banking distribution channel and gain better. Bank

partnerships provide a geographical reach to the insurer through the banks

existing network without significant investment in infrastructure. Through

agents, the insurer can only sell fewer and large policies to a more upscale

clients. The middleclass income holders who comprise the bulk of bank

customers get very little attention from the agents. By using bank channel,

the insurer can capture much of this under served market.

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 For customers, Bancassurance provides the convenience of dealing

with one financial institution for all financial needs. Apart from the

traditional insurance products, bancassurers have also developed special

products in order to fulfill certain needs the customers which emanate from

banking transactions.

A category of product that can satisfy both the bankers and customers

is the finance and repayment product, the best known of which are the

following: Credit insurance, overdraft insurance and capital repayment

insurance. Credit insurance can be offered in cases where a loan is granted

to the customer and serves as additional security for the bank and financial

protection to the customer in the case of his death or permanent disability

prior to the repayment of the loan.

Overdraft insurance can be offered in two different ways:

a) The cover under the overdraft insurance is equal to the credit facility

used and a monthly premium is paid according to this amount. In the

case where the customer dies and this credit facility has been used, the

outstanding amount due will be repaid to the bank by the insurance

company.

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b) The cover equals the maximum pre-agreed credit facility. In case of

death, the outstanding amount due will be repaid by the insurance

company. If there is an excess between cover and the outstanding amount

due, this amount will be paid to the heirs of the customer. Premiums in

this case can be paid on a monthly or annual basis.

For loans offered for mortgage, educational, personal or business

reasons, a capital repayment scheme through an insurance policy is possible.

The customer is granted the loan and he pays to the bank only the loan

interest. He also takes out an endowment that has a cover equal to the loan

amount and with a duration equal to the repayment period of the loan. The

policy is always assigned to the bank and serves as a repayment tool

whether the customer survives or not.

Insurance can be offered to all deposit accounts as well. The level of

cover is usually determined by factors such as price and underwriting. The

premium in this case is usually paid by the bank. The amount of cover is

usually a multiple of the cash balance in the deposit account. In the case of

death of the depositor, this cash balance is increased accordingly. This is

called Depositors product of bancassurance.

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 Objective achievement insurance policy can be offered to special

deposit accounts where systematic deposits are required to reach a

predetermined objective amount at maturity. However, if the depositor dies

or suffers total permanent disability, the difference between his objective

amount and the cash balance of the account is paid to the depositor or the

depositors estate in addition to the cash balance.

The banks can also offer simple standardized package products. These

products are usually group policies which combine covers and which cost

the customer less than if they are bought individually

The Off the shelf product is specially packaged savings and

protection plans which are targeted at specific needs of customer segments.

These products are parameterized and require little consultation in the sales

process, e.g., tax hedge plan. Group products are packaged for specific

savings and protection needs of certain groups, e.g., corporate employees.

Unit linked products primarily aim to satisfy the investment needs of the

client and are a logical extension of other investment products sold by the

bank. Products under the Universal protection plans address the risk

protection needs of customers and aim to adequately provide for the family

of the insured should the insured event occur

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Distribution Channel

Bancassurers make use of the following distribution channels

Career Agents

Career Agents are full-time commissioned sales personnel holding an

agency contract. They are generally considered to be independent

contractors.

Special Advisers

Special Advisers are highly trained employees usually belonging to

the insurance partner, who distribute insurance products to the bank's

corporate clients. Banks refer complex insurance requirements to these

advisors.

Salaried agents

The salaried agents are being fully under the control and supervision

of bancassurers. Salaried Agents in bancassurance are similar to their

counterparts in traditional insurance companies and have the same

characteristics as career agents.

Platform Bankers

Platform Bankers are bank employees who spot the leads in the banks

and gently suggest the customer to walk over and speak with appropriate

255
representatives within the bank. Platform Bankers can usually sell simple

products. The bank employees are assisted by the bank's financial advisers.

The bank employee establishes the contact to the client and usually sells the

simple product.

Direct Response

Under this distribution channel the consumer purchases products

directly from the bancassurer by responding to the company's advertisement,

mailing or telephone offers. This channel can be used for simple packaged

products which can be easily understood by the consumer without

explanation.

Electronic Media

The insurance products can be sold through Internet banking which is

already securely established as an effective and profitable basis for

conducting banking operations. The advantage of this medium is scale of

operation, strong brands, easy distribution and excellent synergy with the

internet capabilities.

Outside Lead Generating Techniques

This channel includes seminars and symposium. Seminars in

particular can be very effective because in a non-threatening atmosphere, the

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insurance counsellor can make a presentation to a small group of business

people, field questions on the topic, and then collect business cards.

If an insurance or investment product offers basic protection or the

promise of reasonable return at a fair price, consumers will buy it if the

product, the distribution system and the channel are compatible. Low

penetration of insurance in emerging markets is not a failure of product

design, but a failure of the distribution system. Bancassurers can tap all the

channels identified in the model: Viz., direct mail, telemarketing, platform

bankers, Internet, in-house specialists, Career Agents or professional

financial advisors.

Traditional life insurers are often trapped: they create a product with

features attractive to agents (such as high commissions), and then let the

agents find appropriate target markets. This is a type of "top-down" product

development approach. Many banks entered bancassurance with a defensive

strategy in their attempt to avoid market share erosion by insurance

companies.

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Strategy

Bancassurance strategies should be driven by markets and channels,

encompass a broad range of tactics and practices, and leverage the

competencies of the bank and the insurer. A rationalized bancassurance

strategy will build on the superior brand equity of banks by integrating

insurance into the bank product portfolio and distribution infrastructure. One

of the key economic advantages of bancassurance is the savings achieved

through efficient utilization of the bank's existing distribution channels.

Bancassurers should plan a technological infrastructure that will

exploit customer information found in the bank's database to uncover sales

opportunities. Bancassurers should use technology to simplify the insurance

purchase as much as possible, thereby making the purchase an easier, more

pleasant experience. An effective bancassurance strategy acknowledges the

fundamental cultural conflict between the bank and the insurance company

by aligning the bank's interests with those of the insurance company.

Bancassurance Models

Owing to the diversity across banks and insurers, there are no

prescribed sales models for specific partnerships that guarantee success.

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Separate sales force

In its most simple form, this model requires minimum integration

between the staff of the partners and merely utilizes the customer database

for insurance product prospecting.

Hand in Glove

This model entails the sales force of the insurer utilizing the resources

of the Bank.

Fully Integrated

Under this model, the insurance sales process is wholly owned by the

Bank staff, while the insurer acts only as a product and service provider. The

integrated model is by far the most successful bancassurance business model

and only under this model do banks achieve a dominant market share.

Non-integrated Model
This model is usually implemented when either regulation or tax

treatment does not allow a close integration of banking and insurance

activities.

In this model, banks life insurance products are usually offered by

specialized advisers on a more selective basis after performing a need

analysis.

259
Open Architecture Model

This model can be implemented either because of regulatory

constraints or to respond to customers demands by offering them a greater

choice of products. Banks are in a position to select the best insurance

partners for each type of product. This model is less efficient than the

integrated models in terms of costs.

Indian Scenario

The first Insurance Company in India that had policies that could be

bought by Indians with "fair value" was the Bombay Mutual Life Assurance

Society which was started in 1871.The first indigenous general insurance

company was the Indian Mercantile Insurance Company Limited which was

set up in Bombay in the year 1907. In the year 1956, the Government of

India announced the nationalization of the life insurance business. The life

insurance industry was nationalized under the Life Insurance Corporation

(LIC) Act of India 1938. The general insurance industry was nationalized in

1972.The General Insurance Corporation (GIC) was set up as a holding

company. It has four subsidiaries: New India, Oriental, United India and the

National Insurance companies (collectively known as the NOUN). Although

Indian markets were privatized and opened up to foreign companies in a

260
number of sectors in 1991, insurance remained out of bounds on both

counts. The government wanted to proceed with caution.

After the publication of the report of the Malhotra Committee,

changes in the insurance industry appeared imminent. The dramatic climax

came in the year 1999. On March16, 1999, the Indian Cabinet approved an

Insurance Regulatory Authority (IRA) Bill that was designed to liberalize

the insurance sector. On December 7, 1999, the new government passed the

Insurance Regulatory and Development Authority (IRDA) Act. This Act

repealed the monopoly conferred on the Life Insurance Corporation in 1956

and the General Insurance Corporation in 1972. The authority created by the

Act is now called IRDA. By the end of March 2009, there are twenty two

life and twenty one non life Insurance Companies in India. The passage of

the IRDA Act paved the way for a number of Indian companies to seek the

foreign partnership. Among the private insurers, BAJAJ ALLIANZ is the

leading player.

Bancassurance in India

Actually, a fact that the many do not know is that bancassurance

existed in a rather limited form in India, well before the general insurance

industry was nationalized in 1972, and even more so before the

261
nationalization of banks in 1969. Before this, a large number of banks used

their then-growing network to distribute insurance products, though these

were mainly general insurance products. The product development and risk

underwriting was done by their group insurance companies. Many of these

products were sold on the lines of a sort of captive business.

Banks have all along been functioning strictly on a traditional

banking style with highly compartmentalised manner. Now that the

banking system enjoys more of structural freedom exposing themselves to

non traditional activities such as insurance, derivatives, investments

banking, etc., there is possibility of migration of risks from the rest of the

activities to the banking system. Thus, the increased market integration and

globalization are demanding new realism on the part of the regulator and

supervisor for stricter prudential regulation.

The RBI has set down the rules for the entry of banks in the field of

insurance. The Reserve Bank of India issued a set of draft regulations to all

the commercial banks and select financial institutions for venturing

insurance business.

All over the world, governments are known to intervene in the

insurance business through regulations to make insurance a catalyst of social

development. The Indian government has also issued detailed guidelines

262
regarding this. IRDA has made it mandatory for every insurer who started

business after the commencement of IRDA Act, 1999 to ensure the

prescribed levels of business from rural and social sectors. The guidelines in

this connection indicate that the life insurer must cover a minimum rural

business of five per cent in the first financial year; seven per cent in the

second financial year, ten per cent in third financial year; twelve per cent in

the fourth financial year and fifteen per cent in the fifth year of total policies

written during that year. In respect of a general insurer, the prescribed limit

is - two per cent in first financial year, three per cent in second financial

year and five per cent thereafter of total gross premium income of that year.

In respect of social sector, all insurers are supposed to cover five thousand

lives in the first financial year, seven thousand five hundred lives in second

financial year, ten thousand lives in third financial year; fifteen thousand

lives in fourth financial year and twenty thousand lives in the fifth financial

year.

These rural and socially disadvantaged sectors are very difficult to

service. They are scattered geographically in small indigenous social groups.

It is very difficult to identify their need and design products that are viable

as well as acceptable to these segments. In fact, the real issue is cost

effectiveness. These target clienteles can be addressed by spending

263
substantial amount of money by way of marketing research to identify their

needs and promotional measures to reach them. The coming together of

banks and insurance can provide substantial synergy here. The banks

already have a massive infrastructure spread across the width and breadth of

the country. Banks possess a vast array of market intelligence including

rural and disadvantaged section of the society. This information can be

leveraged to design appropriate products for the specific requirements of

target population. The widespread branch network can be used as a

marketing channel without incurring significant amount of money.

Definitely collaboration between banks and insurance companies can be of

great benefit to service this target group in a cost-effective and financially

viable manner. In fact, it may be noted in this connection that generally

insurance companies suffer from substantial amount of losses in the early

years of their operation. One of the contributory factors in this regard is

social obligations mandated by the government. International experience

shows that even in relatively developed countries it takes a long period of

time to reach out to less privileged regions and segments of population.

Obviously, in India the problem is much larger and more complex.

Bancassurance is an appropriate strategy in this connection.

264
 In the 2001 Report on Currency and Finance, the RBI laid down its

views in more concrete terms. The Reserve Bank, in recognition of the

symbiotic relationship between banking and the insurance industries, had

identified three routes of banks participation in the insurance business, viz.,

(i) providing fee-based insurance services without risk participation. (ii)

Investing in an insurance company for providing infrastructure and services

support and (iii) setting up of a separate joint-venture insurance company

with risk participation. The third route, due to its risk aspects, involves

compliance to stringent entry norms. The Insurance Regulatory and

Development Authority (IRDA) issued circulars in January and February

2003 setting out the ground rules for bancassurance. Now, the IRDA has

also come up with guidelines pertaining to referral arrangements with the

banks.

On December 28, 2000, the State Bank of India (SBI) announced a

joint venture partnership with Cardif SA (the insurance arm of BNP Paribas

Bank). This partnership won over several others (with Fortis and with GE

Capital). Many experts in the industry had awaited the entry of the SBI. It

was well known that the SBI has long harbored plans to become a universal

bank (a universal bank has business in banking, insurance and in security).

265
For a bank with more than 13,000 branches all over India, this would be a

natural expansion.

The entry State Bank of India (SBI) was groundbreaking for several

reasons. This was the first for an Indian bank to enter the insurance market.

Second, even though the regulators have said that banks would not

(generally) be allowed to hold more than 50 percent of an insurance

company, the SBI was allowed to do so (with a promise that its share would

be eventually diluted). Eversince the entry of the SBI, a number of other

insurance companies have declared their desired banking partners. In this

process, both life and non-life companies have tied up with banks.

The Bancassurance Model in India

In India there are only 3 bancassurance models that are practically

followed by banks and insurance companies. They are (1) Referral

Arrangement (2) Corporate Agency Arrangement and (3) Joint Venture

Agreements.

Referral Model

Banks intending not to take risk could adopt referral model wherein

they merely part with their client data base for business lead for

commission. This model would be suitable for almost all types of banks

266
including the Regional Rural Banks and cooperative banks and even

cooperative societies both in rural and urban.

Corporate Agency

The other form of non-risk participatory distribution channel is that of

corporate agency, wherein the bank staff is trained to appraise and sell the

products to the customers. Here the bank as an institution acts as corporate

agent for the insurance products for a fee/ commission. This model is best

suited for majority of banks including some major urban cooperative banks

because neither there is sharing of risk nor does it require huge investment

in the form of infrastructure and yet could be a good source of income.

Insurance as Fully Integrated Financial Service/ Joint ventures

Apart from the above two, the fully integrated financial service

involves much more comprehensive and intricate relationship between

insurer and bank, where the bank functions as fully universal in its operation

and selling of insurance products is just one more function within. This

includes banks having a wholly owned insurance subsidiaries with or

without foreign participation.

267
Bancassurance business in India

The bancassurance has emerged as a very important channel for

distributing Insurance products in India. The bancassurance channel

accounts for about 35 percent of the total new premiums collected by the

Industry in India. SBI Life Insurance Company and Aviva Life Insurance

are the two major players with nearly a two third or more of their premiums

coming from the bancassurance segment.

Aviva Life Insurance Company has tie-ups with close to 40 banks.

Bancassurance contributed almost 65 percent of the companys total new

business premium of Rs192 crore, during the year 2004-2005. The

bancassurance channel still contributes 68 percent of the total new business

premium of the company in the year 2008 2009. Birla Sunlife Insurance

Company has six banking partners and the Insurance product are sold

through 1000 branches. Incidentally, it may also be noted that the first

bancassurance policy in India was sold by Birla Sun. Bancassurance has

contributed approximately 20 percent of the Birla Sunlife Insurance

companys annualized premium.

The contribution of bancassurance accounts for almost 30 percent of

the total new business premium of Tata AIG Life Insurance company for the

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financial year 2008 2009. Bajaj Allianz Life Insurance company gains

almost 28 percent of their new business premium through bancassurance.

Life insurance Corporation of India accounts for the major share of

the life insurance business in India. The Corporation still depends

considerably on individual agents and the business through the

bancassurance channel is very limited or even negligible (1 percent) in

relation to the overall business.

SWOT Analysis

Strength

Bancassurance is a means of product diversification and a source of

additional fee income for the banks. Banks have the expertise on the

financial needs of customers and also have lower distribution cost. Thus,

they are the fastest emerging distribution channel for insurance products.

Insurance companies see bancassurance as a tool for increasing their market

penetration and premium turn over. Through bancassurance, the customer

gains in terms of reduced price and quality products.

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 In India, there is a vast untapped potential waiting to be mined for

various Insurance products. Penetration of commercial banks in India has

been quite extensive. Banks can prove to be an ideal vehicle for selling

insurance products due to their existing wide net work of branches all over

the country including the rural areas. The stringent RBI norms have helped

the commercial banks to bring down the proportion of Non-performing

assets. Thus, the commercial banks will feel more comfortable to get into the

insurance business more directly. There is a problem of overstaffing in the

banks in India, especially the Government owned banks. The commercial

banks can redeploy some of their existing staff for selling insurance

products. Thus, the excess staffing problem may be a blessing in disguise for

bancassurance business in India.

The banks are culturally more acceptable to the society than the

Insurance companies and this status of commercial banks will trigger as a

boost for bancassurance. The fee based income that the commercial banks

earn through bancassurance will supplement their core lending activities and

boost their profitability. Banks can retain the customer base by offering

innovative insurance products over and above the conventional banking

activities. Acquisition cost of Insurance customers through banks is low.

This benefit could go to the customers in the form of lower premiums.

270
Insurers who operate through bancassurance own and control relationships

with customers. Banks have vast experience in marketing and this will be

another key factor for the success of bancassurance in India.

Weakness:

Complete integration of branch network involves huge investments

for creating information technology and communication infrastructure. This

is one of the hurdles for the success of bancassurance in India. Low savings

rate, especially among the middle income group is another drawback for the

bancassurance. Inflexibility of insurance products is another area of concern

for the success of bancassurance. The tax structure in the country may

dampen the progress of bancassurance in India.

Opportunities:

The bancassurance will be a highly profitable proposition if the

commercial banks are able to successfully mine their vast customer

databases. Middle income consumers get little attention from the traditional

agents. Through bancassurance, the insurers will recapture much of this

under served market. The formidable agent networks of the public sector

insurers pose a strong competition to the new private insurers. To counter

this challenge, the private Insurance companies can make use of the wide

271
distribution network of commercial banks through bancassurance. Hardly

one fourth of the bank branches in India is engaged in selling Insurance

products. If more and more branches start selling insurance products,

particularly co-operative banks, the penetration of insurance especially in the

rural areas. The financial environment in India has become uncertain and

fragile. Against this backdrop, the life Insurance products still have a bright

future even though there are several other competing products from banks.

Today, the life has become more uncertain and risky and these uncertain

times create huge opportunity for insurance business in India. Micro

Insurance will be promoted to a great extent through bancassurance. The

involvement of top level management of banks in bancassurance is active,

this business model will further go heights. Out of branch models will

further enhance the scope of bancassurance in India.

Threats:

The basic attitudinal incompatibility on the part of the employees of banks

and insurance companies and the perception of customers about the poor

quality of banking services in India remain a real threat to the growth of

bancassurance in the country. Insurance in India is perceived more as a

saving option than providing risk cover. This may create an adverse feeling

272
in the minds of the bankers that such products may lessen the sales of

regular banking products. Banks could feel apprehension about the

possibility of substitution effect between its own products and insurance

products. A thorough understanding of the insurance products by the bank

staff is a pre-requisite for the successful bancassurance model. Increasingly

complex insurance products add more difficulties for the bank staff. Bankers

in India require strong motivation to deal with bancassurance because they

are extremely nave in insurance products as they have no previous

experience to deal with them. The private insurance firms find it difficult to

cope with the frequent change in the management of the public sector banks.

The new experiment of bancassurance initiated as a result of the latest round

of reforms should not leave any loopholes for abuse of financial powers

inherent in managing an Insurance company. There is a need for a high level

steering committee consisting of RBI Governor, SEBI chairman and IRDA

chairman for the success of bancassurance in India. With more integration

between and among various constituents of financial sector, there is a greater

possibility for contagion effect.

273
Perception of Consumers

To gather first hand information from the consumers of

bancassurance, a survey was conducted among 300 respondents. The

majority of the respondents are business men. Fifty one percent of the

respondents are in the age group of 30 to 40 years. Seventy six percent

respondents are male. Majority of the sample customers are married. The

annual income of 70 percent of the respondents are in the bracket of 2 to 6

lakh Rupees per annum. The majority of the respondents are the customers

of public sector commercial banks. Ninety one percent respondents maintain

Savings Bank Account and or Current Account with their banks. Only two

percent of the sample respondents in the study area has more than 7 years of

continuous association with their banks. All the 300 respondents in the study

area are holding life insurance policies and 98 among them are holding

general insurance policies also.

The majority of 69 percent of the respondents agree that the insurance

gives them the required protection. In total 120 respondents constituting 40

percent of the samples agree that the insurance is an absolute necessity for a

family. It is heartening to note that almost 90 percent of the respondents

have a fair idea about bancassurance and the related products offered by the

banks. It is an important fact that out of the total 300 sample respondents,

274
only 114 respondents are the real customers of bancassurance and majority

of them are business people. The banks themselves are the major sources of

information for the customers of bancassurance in the study area.

The maximum number of insurance policies taken by the sample

customers is related to loan, either car financing or home loans. Insurance

agents still play a very important role in the distribution of insurance policies

to the customers. It will take some time for the banks to replace them. It is

observed during the study that 45 percent of the respondents agree that the

expert advice given by the banks is the major merit of bancassurance. A

good majority of 66 percent respondents agrees that it is convenient for them

to purchase the insurance products from their banks. Fifty three percent

respondents are of the view that easy accessibility is a major merit of

bancassurance. Most of the respondents are satisfied with the customer

services provided by the banks towards bancassurance. It is very clear that

the banks initiatives in displaying the features of various insurance products

have a definite positive impact in the minds of the customers. This is a

definite strength of bancassurance. The impact of the displays inside the

bank offices on the familiarity of different types of Insurance policies among

the customers are more than that of the websites of the respective banks.

Majority of the respondents agree that the bank employees take sincere

275
efforts to familiarize various products of their insurance partners among

their customers through direct contacts and phone calls.

A vast majority of the respondents are of the view that the modern

banks should be financial super-markets offering various financial products.

This perception of the respondents really gives a strong phillip to the growth

of bancassurance in India. More than 80 percent of the sample respondents

agree that the banks are more reliable institutions for buying the insurance

products.

6.2 SUGGESTIONS

Banking personnel need rigorous training to adapt to insurance

business. In this context, one viewpoint is that the bank employees by their

past track record cannot be trusted to become customer-friendly overnight.

But if we look at the developments taking place over the last few years, we

can say with confidence that bank employees in the public sector banks have

responded in a very encouraging manner to the challenges thrown at them

through competition by private sector banks. It implies that given the chance

and requisite training, they can also become successful in insurance sector.

276
 The road to Bancassurance has been laid. A few Bancassurance

vehicles have started their journey on the road; but they have miles to go.

Bancassurance ventures should primarily strive to remain safe and sound

through proper corporate governance, risk management and operational

practices. Good customer service should remain another important goal of

bancassurers. In a competitive market, where products are cloned in no time,

customer service provides one with the necessary cutting edge to remain

ahead of others. In this, technology will have a dominant role to play.

Product research through market surveys is also essential. Nevertheless,

bancassurers, at least for some time to come, will concentrate on urban and

rural areas of business.

The success of bancassurance greatly hinges on banks ensuring

excellent customers relationship, therefore banks need to strive towards that

direction. The changing mindset is cascading through the banking sector in

India and this would be the right time for banks to resorting to

bancassurance, especially in the context of proactive policy environment of

regulatory authorities and the Government. The fact that the banking

operations in India, unlike in other developed countries, are still branch

oriented and manually operated vis--vis highly mechanized and automated

banking channels, viz., internet banking, ATMs, etc. are all the more

277
conducive for flourishing of bancassurance. Regulators could explore the

possibility of allowing banks having tie-up arrangements with more than one

insurance company, giving wider choice for the customers. In addition to

acting as distributors, banks have recognised the potential of bancassurance

in India and will take equity stakes in insurance companies, in the long run.

This is somewhat similar to a trend observed in the United Kingdom and

elsewhere where banks started off as distributors of insurance but then

moved on to the fully owned insurance subsidiaries. Going by the present

pace, bancassurance would turn out to be a norm rather than an exception in

future in India. Supervisory concerns as pointed out earlier, could best be

tackled by way of closer and systematized coordination between the

respective supervisory authorities. There needs to be a clear cut

identification of activities between banking and insurance at the institutions

level as also at the level of regulators.

The proper implementation of bancassurance is still facing some

problems such as, poor manpower management, lack of sales culture with in

the banks, detachment of branch manager, insufficient product promotion,

managerial database expertise, inadequate incentives, negative attitude

towards insurance etc. In order to get the full benefit of it the following steps

should be taken:-

278
 i) Service delivery mechanism should be strengthened.

ii) Knowledge of target customer needs should be developed.

iii) Extensive and high quality training should be ensured.

iv) Strategies consistent with the banks vision should be developed.

v) Bank's data base system should be made flexible to cope with the
change.

It is the need of the hour for the bancassurance venture to inculcate

new ideas and new thinking approach, and work culture to dominate the

world of tomorrow.

In India two separate institutions monitor the bancassurance business.

The RBI has their own guidelines and the IRDA has its own set of

guidelines. These regulation sometimes conflict each other. It is

recommended that there should be one single regulator to monitor banking,

security and insurance business. The formation of financial service

Authority of India (FSAI) is the need of the hour.

To research out more customers through websites, the commercial

banks can educate the customers by sending frequent emails with attractive

synopsis to the e-mail IDs of the customers about the various insurance

policies with the link carrying them to the bank website. More popup

279
window and frequent play of geographical displays can also attract the

customers who are visiting the bank websites.

Emphasis can also be given to promote insurance as an investment

option as most of the respondents are uncertain about it. This will also help

them to reach more customers.

The bank should further concentrate in providing personalized

services to their customers as are provided by the conventional insurance

agents. The bank should also provide after sales services to the customers for

the betterment of bancassurance in India.

The Insurance companies need to design products specifically for

distributing through banks. Trying to sell traditional products may not work

so effectively. For bancassurance to succeed, products and processes will

need to be tailored to bank markets, rather than adjusted to insurers

specifications. Banks and Insurance companies should apply all the skills

and potential in this area and take advantage of the same and they should

improve the products from time to time according to the needs of the

customers.

280
 The employees of the banks who are selling insurance products must

be given proper training so that they can answer to any queries of the

customers and can provide them products according to their needs.

Banks should also do the settlement of claims which will increase the

trust and reliability of the customers on the banks.

In India, since the majority of the banking sector is in public sector

which has been widely responsible for the lethargic attitude and poor quality

of customer service, it needs to rebuild the blemished image. Else, the

bancassurance would be difficult to succeed in these banks.

A formal and standard agreement between these banks and the

insurance companies should be taken up and drafted by a national regulatory

body. These agreements must have necessary clauses of revenue sharing. In

case of possible conflicts, the bank management and the management of the

insurance company should be able to resolve conflicts arising in future.

281
6.3 CONCLUSION

Bancassurance is not just selling insurance, but it is also about

changing the mind sets of doing a plain vanilla banking. The time has come

for banks to move beyond their traditional business to turn into a financial

super mall; of course with necessary safeguards and after a meticulous due

diligence process. Bancassurance has been a phenomenal success and

although slow in gaining momentum, it has taken off in India.

The growth of bancassurance will primarily depend on the customers

response, ability of insurers and banks to understand each others business;

iron out the differences and seize the emerging opportunities. It is the need

of the hour for the bancassurance venture to include new ideas, and new

thinking approach and work culture to dominate the world of tomorrow.

Bancassurance will definitely play a defining role as an alternative

distribution channel and will change the way insurance is sold in India.

Bancassurance in India has just taken a playing start, but it has a long way to

go SKY IS THE LIMIT.

282
6.12 AREA OF FURTHER STUDY:

It would be highly contributing to bancassurance literature, if

additional light is shed on the performance of the insurers and their

profitability as a result of their venturing into bancassurance. Any research

on bancassurance will be complete only if the insurers are also taken into the

ambit of study. This is a fundamental component which determines the

success of bancassurance as a significant distribution channel. This aspect

may be investigated in detail in future research. Also the perception of the

employees of banks about the bancassurance may be of huge interest to be

explored.

283
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293
APPENDIX
 APPENDIX

BANCASSURANCE THE INDIAN EXPERIENCE

QUESTIONNAIRE TO THE CUSTOMERS OF BANCASSURANCE

PERSONAL INFORMATION

1 Name :

2 Residential Address :

3 Age : Years

4 Sex : Male Female

5 Marital Status : Married Unmarried

6 Details of Children : Daughter/s

Son/s

7 Educational Qualification :
SSLC
GRADUATE
POST GRADUATE
PROFESSIONAL DEGREE
OTHERS
 -2-
8 Occupation :
Salaried
Business Man
Retired
Others

9 Annual Income from all sources :

Less than Rs.2,00,000
Rs.2,00,000 Rs.4,00,000
Rs.4,00,000 Rs.6,00,000
Above Rs.6,00,000

10 Name the Bank in which you :

Maintain your account

11 Type of the Bank Account : Saving Account only

Current Account only
Both Saving and Current Account
Other Account

12 For how many years you have : <1 Year

been operating the account/s with 1 3 Years
the same bank? 3 5 Years
5 7 Years
> 7 Years

13 Mention the nature of your : Life Insurance only

Insurance product General Insurance only
Both Life and General Insurance
 -3-
14 Mention the Source of Purchasing : Banks
the Insurance Policy Agents
Other Sources

15 Please Indicate your views based on your experience and expertise by placing a [ ]
mark at the appropriate column in the five point response scale given below:
1) Strongly Agree : (SA)
2) Agree : (A)
3) No Opinion : (NO)
4) Disagree : (DA)
5) Strongly Disagree : (SDA)

Express your views about the Insurance Products

SA A NO DA SDA
Insurance Provides Protection
Insurance is an absolute necessity
Insurance (Life) is an investment option

16 Are you aware of Bancassurance? : Yes No

17 Mention the sources of : Banks

Information about the Advertisement
Bancassurance Friends and Relatives
Other Sources

18 Kind of Insurance Policy taken : Deposit based Polices

from Banks Loan based Polices
Life Polices
Other Polices
 -4-
19 Mention the reasons for taking an : Security
Insurance Policy through Savings
Bancassurance Brand Image of Banks
Brand Image of Insurers

20 Mention your choice of the mode : Insurance Agent

of Insurance Distribution Channel Banker
Insurance Companies
Brokers
Others

21 Satisfaction level of Bancassurance : Highly Satisfied

Customers Satisfied
Moderately Satisfied
Dissatisfied
Highly Dissatisfied

Please indicate your views based on your experience and expertise by placing a [ ]
mark at the appropriate column in the five point scale given below:
1) Strongly Agree : (SA)
2) Agree : (A)
3) No Opinion : (NO)
4) Disagree : (DA)
5) Strongly Disagree : (SDA)

22 The following are the important Advantages of buying the Insurance Products
through banks.
SA A NO DA SDA
Bankers give Expert Advice
It is convenient to buy Insurance products
through banks
Banks are easily accessible
 -5-
23 The following are the major initiatives taken by the bankers in promoting
Bancassurance:
SA A NO DA SDA
Frequent displays made by the respective
banks familiarize the Insurance products
among the customers

Bank websites make the Customers more

familiar with different types of Insurance
Polices

Direct contacts and phone calls by the bank

employees familiarize the Insurance products

The modern banks act as One Stop Shop

for all financial needs

Banks are more reliable than Insurance

Companies

Banks understand the customer needs better

and provide expert advice

24 Do you plan to take any life Insurance Policy in the near future?
Yes No

25 Assume you plan to take a Life Insurance Policy in near future, your preferred
channel for acquiring the Insurance Product:
Bancassurance
Other Channel